Central Banks Mustn’t Hail Victory Too Soon, BIS’s Carstens Says

(Bloomberg) — Central banks mustn’t declare victory over inflation too soon and might have to stick with higher interest rates for a while, according to the head of the Bank for International Settlements.

“Monetary policy will need to prioritize the inflation fight, until it is decisively won and price stability is restored,” General Manager Agustin Carstens said in Frankfurt on Monday. “The tighter stance may need to be maintained for a long time, for only through resolve, perseverance and success can trust in money be preserved.”

The remarks precede central-bank decisions in coming days affecting almost half of the world economy as officials try to identify the appropriate juncture to begin cutting rates after historic tightening campaigns in 2022 and 2023.

Among those meeting this week are the US Federal Reserve, the Bank of England and the Swiss National Bank. The European Central Bank earlier this month kept borrowing costs unchanged, but signaled that it may start easing in June.

Some ECB policymakers have recently intensified their push for rate cuts this year. Greece’s Yannis Stournaras told Bloomberg last week that two moves before the central bank’s August summer break and two after that are appropriate.

Carstens suggested that a sharp slowdown in inflation globally mustn’t breed complacency.

“It seems that we are on route to a soft landing,” he said, while cautioning that such a scenario “is not guaranteed.” Inflation still exceeds targets and “there will surely be more bumps in the road,” he said. 

“The medium-run risks to inflation – such as deglobalization, economic fragmentation, adverse demographic trends and the need to fight climate change – reinforce the need for central banks to stay the course,” said Carstens.

The BIS chief stressed that the improving price backdrop is “thanks to the forceful, opportune and decisive monetary-policy response.”  

While lower commodity costs and the easing of pandemic-related supply disruptions played an important role, central banks’ resolute action “prevented changes in ‘inflation psychology’ from taking hold and kept second-round effects at bay,” he said.

This is in contract with some economists and investors arguing that the sharp price increases would have come down also without rate hikes, because of falling energy costs.

Carstens referred to a BIS study published in December showing that “if central banks had not tightened policy, inflation would have stayed high, even as the pandemic-related supply shocks faded.”

He also called for prudent budgetary policies to secure trust in money. “It is imperative for fiscal authorities to curb the relentless rise in public debt,” he said. Consolidation in many economies “needs to start now,” he said. “Muddling through is not enough.”

Carstens also urged “greater realism” about what fiscal and monetary policy can deliver. 

“Fostering unattainable expectations about policymakers’ ability to smooth out every economic pothole will ultimately lower trust in public policies,” he said.

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