BIS urges cen­tral banks to hike rates

Khaleej Times - - BUSINESS - Marc Jones Reuters

LONDON — Ma­jor cen­tral banks should press ahead with in­ter­est rate in­creases, the Bank for In­ter­na­tional Set­tle­ments said on Sun­day, while recog­nis­ing that some tur­bu­lence in fi­nan­cial markets will have to be ne­go­ti­ated along the way.

The BIS, an um­brella body for lead­ing cen­tral banks, said in one of its most up­beat an­nual re­ports for years that global growth could soon be back at long-term av­er­age lev­els af­ter a sharp im­prove­ment in sen­ti­ment over the past year.

Though pock­ets of risk re­main be­cause of high debt lev­els, low pro­duc­tiv­ity growth and dwin­dling pol­icy fire­power, the BIS said pol­i­cy­mak­ers should take ad­van­tage of the im­prov­ing eco­nomic out­look and its sur­pris­ingly neg­li­gi­ble ef­fect on in­fla­tion to ac­cel­er­ate the “great un­wind­ing” of quan­ti­ta­tive eas­ing pro­grammes and record low in­ter­est rates.

New tech­nolo­gies and work­ing prac­tices are likely to be play­ing a roll in sup­press­ing in­fla­tion, it said, though nor­mal im­pulses should kick in if un­em­ploy­ment con­tin­ues to drop. “Since we are now emerg­ing from a very long pe­riod of very ac­com­moda­tive mon­e­tary pol­icy, what­ever we do, we will have to do it in a very care­ful way,” BIS’s head of re­search, Hyun Song Shin, told Reuters.

“If we leave it too late, it is go­ing to be much more dif­fi­cult to ac­com­plish that un­wind­ing. Even if there are some short-term bumps in the road it would be much more ad­vis­able to stay the course and be­gin that process of nor­mal­i­sa­tion.”

Shin added that it will be “very dif­fi­cult, if not im­pos­si­ble” to re­move all those bumps.

Good com­mu­ni­ca­tion from cen­tral bankers will be im­por­tant, but even more cru­cial is the need for banks to be strong enough to cope with any tur­bu­lence.

The BIS iden­ti­fied four main risks to the global out­look in the medium-term.

A sud­den flare-up of in­fla­tion which forces up in­ter­est rates and hurts growth, fi­nan­cial stress linked to the con­trac­tion phase of fi­nan­cial cy­cles, a rise in pro­tec­tion­ism and weaker con­sump­tion not off­set by stronger in­vest­ment.

The first seems un­likely for now at least, with Shin say­ing that the BIS, like many, had been sur­prised that in­fla­tion and wage growth has re­mained so sub­dued as growth in ma­jor economies has picked up.

The ques­tion for cen­tral bankers, there­fore, is whether new tech­nolo­gies and work­ing prac­tices had fun­da­men­tally changed the in­puts in their eco­nomic mod­els and whether it is right to keep such a

In­fla­tion is cer­tainly not the only vari­able that mat­ters... and we should keep one eye at least on fi­nan­cial de­vel­op­ments Hyun Song Shin, Head of re­search at BIS

heavy fo­cus on keep­ing in­fla­tion at cer­tain lev­els — near 2 per cent for likes of the Euro­pean Cen­tral Bank and US Fed­eral Re­serve.

“In­fla­tion is cer­tainly not the only vari­able that mat­ters... and we should keep one eye at least on fi­nan­cial de­vel­op­ments,” Shin said.

A broad­en­ing away from in­fla­tion­tar­get­ing to fi­nan­cial mar­ket con­di­tions would re­quire a mind­set change in large parts of the world and could speed up in­ter­est rate cy­cles.

When the US Fed­eral Re­serve last em­barked on rate in­creases more than a decade ago, it took two years to raise them from one per cent to above 5 per cent, with hikes at 17 con­sec­u­tive meet­ings. In the cur­rent cy­cle, it has taken 18 months for a one per­cent­age point in­crease.

The BIS re­port added that the lack of clar­ity over in­fla­tion also makes it far harder to judge how far rates could go up be­fore they start com­ing down again.

“In prac­tice, there­fore, cen­tral banks have lit­tle al­ter­na­tive but to move with­out a firm end-point in mind,” it said. —

The BIS said global growth could soon be back at long-term av­er­age lev­els af­ter a sharp im­prove­ment in sen­ti­ment over the past year.

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