BIS Says Markets Underestimating Central Banks’ Resolve in Inflation Fight
27 February 2023
By Xavier D’Arcy – FRANKFURT (Econostream) – The Bank of International Settlements warned on Monday that markets’ rate cut bets were premature, as central banks will need to keep rates higher for longer to tackle high inflation.
In its quarterly review, the BIS said that there was a ‘sharp contrast’ between interest rate futures, which signalled ‘a firm expectation that rate hikes would stop before the end of this year and that policy rates would decline materially in 2024’, and central banks, which ‘remained much more cautious in their communications.’
Markets had not sufficiently taken into account that ‘policymakers gave no indication that easing was on the horizon, reflecting concerns about still elevated inflation – with core inflation substantially above target – and upside risks that persisted on the back of generally tight labour markets’, the report said.
Speaking on the findings of the review, Claudio Borio, head of the monetary and economic department at the BIS, said that there was a gap between markets and policymakers that bore ‘the risk of an abrupt repricing.’
This gap had been narrowing of late, something which was welcome, he said.
‘Central banks have been very clear about the priority of getting the job done and of being cautious about declaring victory too early’, he said, adding that such a ‘cautious attitude is the appropriate one.’
He said that insufficient tightening could risk a similar situation to the 1970s: ‘What you don't want to do at all costs is to repeat the stop-go policies of the 1970s when you are reversing and you then realise that the job has not been done, then you have to go back and forth.’
Hyun Song Shin, BIS head of research, said that if central banks failed to stay the course, they could ‘open the door to a new increase in inflation.’
He said that policymakers were emphasising the importance of ‘going the last mile on bringing down inflation’, because ‘if you are not fully back to target and relax too early, you will undo all the work you have done before.’
Borio also underlined the difficulty in bringing inflation all the way back to target. It was ‘much easier to get inflation from 8% to 4% when the work is done by commodity prices, than it is to get it from 4% to 2%, which is the part that central banks will have to do’, he said.