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The Bank for International Settlements said that inflation may soar this year, putting pressure on the central bank to raise government borrowing costs to post-war highs. The bank warned that during the post-pandemic recovery period, policymakers face “dreading The problem.
Due to the cost of the pandemic, UK government debt has soared to £2.2 trillion, and the jump in interest rates to levels in the 1990s may more than double the cost of national borrowing.
The Swiss-based Bank for International Settlements (often referred to as the central bank of the central bank) stated that in the short term, monetary policymakers should maintain ultra-low interest rates in order to sustain the post-pandemic recovery. The warning comes from the annual economic report released on Tuesday.
However, they should send a signal to financial markets and consumers that they will raise interest rates when necessary to prevent inflation from becoming a persistent problem.
“The uneven recovery presents daunting challenges for policymakers,” the Bank for International Settlements report said.
“If interest rates start to rise, the sustainability of debt may change,” added Augustine Carstens, general manager of the Bank for International Settlements. “You don’t want to be surprised.”
The report contains forecasts for various countries, including the United Kingdom, based on various scenarios. In one of the more bleak forecasts, the Bank for International Settlements stated that UK interest rates may return to the 1990s average of 6%, increasing the current annual debt service level from 47 billion pounds a year to nearly 100 billion pounds.
As governments loosen lockdown measures, vaccination programs allow more people to shop, and seal up businesses to reopen, inflation rates in most economies around the world are rising.
The annual price increase in the U.S. reached 5% last month and tripled in two months The UK will reach 2.1% in May. House prices in the UK are growing at the fastest rate in 17 years. Data released by Nationwide on Tuesday showed, The annual price increase in May jumped to 13.4%.
Some economists, including former Bank of England Governor Lord King and the bank’s former chief economist Andy Haldane, advocate increasing borrowing costs to limit consumer spending power and ease upward pressure on inflation.
However, most academics and urban economists believe that some of the main drivers of inflation, including shortages of raw materials and basic components for cars and computers, are unlikely to last until next year.
The report of the Bank for International Settlements states: “As inflation concerns persist, communication will be tested to the fullest. The central bank faces a delicate balancing act.
“On the one hand, they need to assure the market that they are willing to continue to support the economy when necessary. On the other hand, they also need to assure them of their ability to resist inflation and be prepared for normalization.”
When asked whether this means that the central bank should now respond to quelling inflation, Carstens told Reuters:
“It is inappropriate to tighten monetary policy today just to reduce measurable inflation and sacrifice economic recovery.”
Speaking of the supply chain bottlenecks that caused the delay in global cargo transportation, he added: “As of today, we at BIS believe this is likely to be temporary.”
The Fed came under fire earlier this year because it seemed to say that even if inflation rises and stays high for a few years, it will maintain low interest rates.
Earlier this month, Chairman Jerome Powell (Jerome Powell), based on his prediction of the recovery, stated that interest rates would start to rise in 2023, which seemed to reverse this policy.
Carstens, who served as the governor of the Bank of Mexico before joining the Bank for International Settlements, said that high inflation will lead to a “significant tightening of global financial conditions”, making corporate and government borrowing more expensive, and causing markets to withdraw funds from developing countries. .
“The main challenge for the rest of this year is how to coordinate market expectations and policy implementation.” Carstens said. “I think one of the problems we have seen in the past few months is that the market is ahead of the Fed,” he said.
The report also examines how Covid’s disproportionate damage to low-income workers and the multi-trillion-dollar stimulus-driven stock market leap has exacerbated concerns about inequality.
These concerns have been increasing since the financial crisis more than ten years ago. The current surge in global housing prices—another major macroeconomic issue currently focused by the Bank for International Settlements—usually benefits the elderly at the expense of the young.
The Bank for International Settlements stated: “It is unrealistic to use monetary policy more directly to address inequality, and it will actually be counterproductive,” because it may reduce some of the flexibility needed to help the economy and control inflation, both Both should help reduce inequality longer-term.
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