The Bank for International Settlements (BIS), an organization that brings together the world’s central banks, has urged the main economies to continue with the increases in the interest rates despite the growing threat of recession and volatility in the foreign exchange market.
The quarterly report by the Switzerland-based BIS acknowledges that recession and debt risks are rising, but says it remains paramount to reduce the growing world inflation.
“It is important to act in a timely and forceful manner,” said the director of the BIS Monetary and Economic Department, Claudio Borio. “The anticipation (of rate hikes) tends to reduce the probability of a hard landing.”
It is expected that this week Federal Reserve of the United States to raise rates again. The Fed’s sharp moves this year, coupled with Russia’s invasion of Ukraine, have already triggered major turmoil in financial markets.
What makes it especially complex, Borio added, is that it is the first time since at least Second World War where you’re trying to tackle inflation when there’s a debt crisis and there’s a lot of concern about overvalued real estate markets.
In addition, growth forecasts have continued to be revised downwards, while inflation forecasts have continued to rise.
We know that the path is quite narrow,” Borio said. “It is clear that if there was a risk of recession before, the risk has increased.”
The rapid rise in inflation, interest rates and energy prices this year has caused one of the biggest declines in history in financial markets.
Global stock indices have lost more than 16% since January. The yen, euro and most emerging market currencies have been hit, with yields on US Treasury bonds, the benchmark of global lending markets, soaring to record highs since 2011 .
A special section of the BIS report also noted the possibility of more problems to come.
He warned that it would be difficult to substitute Russian oil, given the limited spare capacity of other major producers and little investment in new projects.
This could lead to a persistent increase in the prices of oil-related products, while the jump in natural gas prices could have a broad and prolonged impact on electricity prices and put a big drag on industrial production. .
Outside the United States, the rising dollar is compounding inflation problems and putting pressure on less developed countries that have borrowed heavily in dollars but now struggle to pay it back as their own currencies sink.
“This could exert further pressure to tighten monetary policy in order to avoid a large depreciation and could also induce, as an additional tool, foreign currency intervention, as has already happened in several countries,” Borio said.
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