Rates will have to stay high for years, warns top central bank

PERSISTENT inflation means central banks across the world will be forced to keep interest rates high for years to come as they battle pay demands, warfare and trade disputes, the Bank for International Settlements (BIS) has said.

Inflation is falling “but the job is not done yet”, warned the institution, often known as the central bank for central bankers.

Price rises in services are proving “stubborn” across much of the world, even as goods inflation has come down, following the supply chain chaos of the pandemic and the energy price shock that accompanied Russia’s invasion of Ukraine.

The BIS warned that if price pressures in the services industry persisted, central banks would be forced to keep monetary policy tighter to meet inflation targets.

There is also a longer-term threat from disruption to trade routes and the end of the wave of globalisation that helped hold down costs in the early years of this century, the BIS added.

It said: “Climate change could create upward pressures on goods prices through more severe disruptive weather events or drought-induced restrictions on freight shipping in waterways.

“Geopolitical tensions could add to these pressures, including through a reorganisation of global value chains.

“This means that, all else equal, services price growth may have to be much lower than it was in the decades that preceded the pandemic if inflation targets are to be achieved.” Disruption in recent years has come in the form of a trade war between the United States and China, shipping disruption in the pandemic, and attacks by Houthis on vessels in the Red Sea.

The prospect of long-term disruption raises the likelihood that central banks will have to keep interest rates high for years to come to tackle inflationary pressures in the services industry.

The ageing population also threatens to push up wages and so keep services expensive. Claudio Borio at the BIS said globalisation may no longer help keep costs down.

Globalisation previously held down inflation by opening up Western markets to cheap labour in poorer countries, he said.

Mr Borio added: “That factor over time has tended to wane, and all else equal, we expect that type of tailwind on inflation could become a headwind.”

Huw Pill, chief economist at the Bank of England, last week said interest rate cuts remain “some way off” even if inflation falls below 2pc in the spring.

‘Climate change could create upward pressures on goods prices through more severe weather’