The Bank for International Settlements (BIS) yesterday asked central banks to prioritize the fight against inflation and warned of the risk of recession in the United States and Europe in 2023.
"The risk of stagflation hangs over the global economy because the threat of a new era of inflation coincides with weak growth and high financial vulnerabilities," says the Annual Economic Report, presented yesterday in Basel (Switzerland), the headquarters of the BIS, more known as the bank of central banks.
During the presentation, the general director of the organization, the Mexican Agustín Carstens, was clear: “the key for central banks is to act quickly and decisively before inflation takes root. Should inflation entrench itself, the cost of bringing it back under control will be higher: the long-term benefits of preserving stability for households and businesses outweigh any short-term costs.”
Despite the general rise in prices, the BIS rules out that the global economy will reach price rises like those recorded during the 1970s. "The stagflation of the 1970s is unlikely to repeat itself." According to the BIS, monetary policy and macroeconomic prudence have improved and reliance on energy has been reduced. The report emphasizes this last aspect because in the 1973 crisis the economy was highly dependent on oil. So, the price of this raw material doubled in just one month. Since mid-2021, the price of oil has risen 50%, with peaks during the Ukraine war. "There are reasons to hope that rising commodity prices will be less disruptive," the report says.
The report summarizes that the global economy is entering an era of high inflation with some of the economic problems created by the pandemic and those that have to do with the war in Ukraine. Before the health crisis, the BIS had in recent years described the global economic situation as “Goldilocks”, a fairly ideal situation in which the economy grew, fueled by monetary stimulus but without generating inflation.
But the economy had to face the health crisis and the war in Ukraine: "two hard blows" that could mean a change from an era of low inflation to one of sharp price increases. And even the end of the era of globalization established after the Second World War.
Now the challenge for central banks is to achieve a "soft landing", that is, a cycle of interest rate hikes that ends without a recession, something that has historically been difficult.
