The world economy could see the dawn of “a new inflationary era” amidst rising pressure on prices in the US and Europe which have just emerged from the COVID-19 pandemic, said the leader of a major global central bank organisation, warning of long-term problems for central banks.
Agustin Carstens, head of the Basel-based Bank for International Settlements (BIS), the umbrella body for central banks, said there were strong risks that prices would rise without a sharp rise in interest rates, The Guardian reported.
“We may be on the cusp of a new inflationary era,” Carstens said, adding that new pressures are also coming from labour markets, as workers try to make up for the reduction in real income due to inflation.
In a speech on April 5, Carstens said higher borrowing costs would be required for several years to curtail the inflationary risk, which would cause long-term damage to the economies.
“The structural factors that kept inflation low in recent decades may wane as globalisation retreats,” Carstens said.
According to him, the COVID-19 pandemic and the changes in the geopolitical landscape have resulted in firms rethinking the risks involved in sprawling global value chains.
Global supply chains, which had already been disrupted due to the pandemic, received a further jolt from the Russian invasion of Ukraine since February 24. The ongoing conflict in Europe has triggered a sharp rise in prices of food, energy and other commodities.
“Such increases will feed directly into higher consumer prices. Others, for example, metals, will further stretch global value chains,” Carstens said.
The leading central bank chief blamed loose monetary policy and generous fiscal programmes for the recent spike in consumer prices. Monetary policy in the past year may have acted as a springboard for the rapid expansion, he said.
Several countries are seeing inflation inch towards 10 percent owing to the rise in oil and gas prices as a result of the ongoing crisis in Ukraine. In the UK, the consumer price index stood at 6.2 percent in February, the highest level since the 1990s. In March, the consumer price index in Germany was 7.3 percent, while it was 9.8 percent in Spain.
The Bank of England is in the process of hiking rates and will raise the base rate to 2 percent next year, The Guardian reported.
Similarly, the US Federal Reserve also approved a 0.25 percentage point hike last month from near zero and signalled several more rate rises this year.