Inflation fight to get tougher – BIS

Central banks committed to stay the course

Inflation fight to get tougher – BIS

The work of central banks is far from over – this despite inflation subsiding from multi-decade highs almost everywhere and the most aggressive monetary policy tightening in recent history, the Bank of International Settlements said.

In Australia, the Reserve Bank has hiked rates 12 times in 13 months, taking the cash rate from 0.1% in May 2022 to 4.1%, in a bid to tame inflation, which currently sits at 7%.

In its flagship economic report, BIS, the umbrella body over central banks, said the the last mile to price stability may be the most challenging, with labour markets still tight and price growth in services proving hard to tame, posing the material risk of an inflation psychology taking hold, “where wage and price increases start to reinforce each other.”

“The key policy challenge today remains fully taming inflation, and the last mile is typically the hardest,” said Agustín Carstens (pictured above left), general manager of the BIS. “The burden is falling on many shoulders, but the risks from not acting promptly will be greater in the long term. Central banks are committed to staying the course to restore price stability and protect people's purchasing power.”

The BIS report said central banks are tightening against a backdrop of high debt and asset prices and if they “must tighten more or for longer to achieve price stability, the risk of financial stress will grow.”

Stabilising the economy and the financial system requires fiscal and prudential policies to do their part.

“Governments should tighten their budgets, while targeting support on the most vulnerable, and embarking on a long-term consolidation of their spending,” Carstens said. “This would help curb inflation and keep financial stability risks in check by reducing the need for central banks to keep rates higher for longer.

“Regulatory and supervisory authorities can deploy the full range of tools at their disposal to strengthen the financial system, giving central banks more room to manoeuvre.”

To safeguard stability and trust, BIS said monetary and fiscal policy must operate within a “region of stability.”

“The ultimate risk of drifting outside that region is to lose the trust that society must have in the state and its decision-making,” it said. “In the longer term, policy adjustments and institutional safeguards are needed to ensure that monetary and fiscal policies remain firmly within the region of stability.”

In RBA’s June meeting, Governor Philip Lowe (pictured above right) said high inflation “makes life difficult for people and damages the functioning of the economy.”

“It erodes the value of savings, hurts family budgets, makes it harder for businesses to plan and invest, and worsens income inequality,” Lowe said. “And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. Recent data indicate that the upside risks to the inflation outlook have increased, and the board has responded to this.”

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