Countries must be prepared to raise interest rates again if inflationary pressures return, a top central bank has warned.
The Bank of International Settlements (BIS) has said “it is too soon to declare victory” in the battle against price rises, as it urged central banks to set a “high bar” for lowering rates.
Agustin Carstens, head of BIS, said: “Central banks have shown they can take forceful action to head off the most dramatic increase in inflation in a generation, to protect the purchasing power of people and firms.
“However, it is too soon to declare victory. The job is not yet done.
“Therefore central banks need to persevere in their key objective of bringing down inflation.”
It comes as financial markets and economists increasingly expect the Bank of England to cut its headline interest rate from 5.25pc to 5pc in August, now that inflation is back to its 2pc target.
This is in addition to predictions that the US Federal Reserve will follow suit by lowering from 5.5pc to 5.25pc as soon as September.
However, Mr Carstens warned there is still a risk that inflation could take off again.
The annual report from BIS, often referred to as the central bank for central bankers, said that any spike in wages could lead to a renewed burst in price rises, as could greater geopolitical turmoil.
“Any commodity price spikes linked to, say, geopolitical tensions or the withdrawal of price subsidies would be more likely to trigger second-round effects,” said the institution’s annual report.
“The likelihood is higher following the long phase of above-target inflation, which can encourage and entrench inflation psychology.”
“Central banks have to be very mindful and careful in the process of reducing inflation,” said Mr Carstens.
“If circumstances change or the outlook changes they should be prepared to increase rates but this is, let’s say, an extreme scenario.”
The Switzerland-based institution also warned governments to reduce borrowing as heavy spending risks fuelling more inflation.
“The medium-term outlook for public finances is even more concerning,” said Claudio Borio, head of BIS’s monetary and economic department.
“It poses the biggest threat to macroeconomic and financial stability.
“Without consolidation, public debt ratios are set to climb even if interest rates remain below economic growth rates.
“With mounting spending needs, markets could at some point question fiscal sustainability.
“We know from experience that things look sustainable until suddenly they no longer do – that is how markets work.”
Source Agencies
