The Bank for International Settlements (BIS), has called for central banks to act “quickly and decisively” in raising interest rates to stem rising inflation.
The banking umbrella body recently held its annual meeting, during which representatives of central banks discussed current difficulties following one of the most turbulent starts to a year on record for global financial markets.
Agustín Carstens, general manager of the BIS, called for a speedy response from banks in response to the threat of surging inflation.
“The key for central banks is to act quickly and decisively before inflation becomes entrenched,” said Carstens in a post-meeting annual report published by the organization.
Inflation has reached record levels in a number of countries around the world, with Russia’s invasion of Ukraine driving a spike in energy and food prices. The traditional solution of rising interest rates brings the prospect of recession though, with some analysts already predicting such a scenario for several major economies.
Carstens clarified that the BIS believes it is possible to implement rate increases without triggering recessions, although he accepted the situation was precarious.
“A lot of it will depend on precisely on how permanent these (inflationary) shocks are,” he added, emphasizing the importance of the response from financial markets.
“If this tightening generates massive losses, generates massive asset corrections, and that contaminates consumption, investment and employment – of course, that is a more difficult scenario.”
Major central banks including the US Federal Reserve and the European Central Bank have already started to move away from record low rates, with a number of others set to follow their lead. These moves have triggered one of the largest sell-offs in history, with global stocks down 20% since January.