BIS: Fight inflation despite risk of recession

AOn Monday, the yield on the 10-year US government bond rose to 3.5158 percent, the highest level in more than 11 years. Two-year US bonds even hit a 15-year high at 3.9464 percent. The rise in yields was linked to a sell-off in the bond market in the run-up to the US Federal Reserve's monetary policy meeting, which begins on Tuesday. On the markets it is expected that on Wednesday evening it will again raise the key interest rate by 0.75 percentage points to between 3.00 and 3.25 percent.

Such an interest rate move would find support in Basel at the headquarters of the Bank for International Settlements (BIS). In its quarterly report published on Monday, the institution known as the bank of central banks once again spoke out in favor of decisive action by the central banks in the fight against inflation, even if this increases the risks of a recession and debt crises. Weeks ago, BIS boss Agustín Carstens warned at the central bank meeting in Jackson Hole, USA, that deglobalization and demographic developments could make production more expensive in emerging countries and lead to permanent supply chain bottlenecks.

Against a hard landing

In the current quarterly report, the chief economist at the BIS, Claudio Borio, attributed the recent sell-off on the financial markets to the rude awakening of investors. In the summer months, they were too confident about the solution to the economic problems and have now realized that the central banks will fight persistent inflation regardless of financial risks. Borio believes it is necessary for monetary policy to take timely and decisive action against inflation. Then the rate hikes could reduce the likelihood of a hard landing for the economy.

The BIS chief economist also sees risks for the central banks. It is the first time since World War II that monetary policy has had to fight accelerating inflation amid debt crises and concerns over overvalued property markets. In addition, the recession risk has increased, admitted Borio and spoke of a "very narrow path". The BIS describes the environment that contributes to the violent market fluctuations as the economic consequences of the Ukraine war, the weaker economy in China, the rapid tightening of monetary policy and the energy crisis in Europe. She also blames these factors for the unusually rapid appreciation of the dollar against the euro and the Japanese yen.

In a special article in the quarterly report, the BIS authors warn of the consequences of the embargo on Russian oil supplies. The replacement could be difficult for Western countries. Limiting Russian oil exports is likely to be accompanied by strong and prolonged price increases, BIS economists expect. There could also be an impact on other areas such as food prices. That would be the case if more biofuels were used. That could push up the prices of various staples that would be needed to produce the biofuels.

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