“The key for central banks is to act quickly and decisively before inflation takes hold,” Carstens said as part of the agency’s annual report released on Sunday.
The increase in energy and food prices has generated the highest inflation in decades for many countries, including Mexico, where last week it stood at 7.88% at an annual rate, far from Banxico’s permanent target of 3%.
Faced with the strong increase in prices, the Mexican central bank raised the reference interest rate by 75 basis points in a single movement, for the first time in its history. The current rate in the country is 7.75% and more increases are expected for the remainder of the year.
But the usual remedy of raising interest rates requires raising the risk of recession, and even the dreaded 1970s-style “stagflation,” where rising prices were combined with low or negative economic growth.
Carstens said the emphasis was to perform in the “quarters to come”. The BIS believes an economic soft landing, where rates rise without triggering recessions, is still possible, but acknowledges that it is a difficult situation.
“A lot will depend on precisely how permanent these (inflationary) shocks are,” he said. “If this adjustment leads to massive losses, widespread asset corrections and that taints consumption, investment and employment, of course that’s a more difficult scenario.”
World markets are already undergoing one of the biggest sell-offs in recent history as central banks, including the US Federal Reserve and starting next month the European Central Bank, move away from historically low rates and almost 15 years of continued stimulus measures.
Carstens added that recent warnings from the BIS itself about elevated asset prices meant the current correction was “not necessarily a complete surprise”. The fact that there has been no “serious market turmoil” so far is also reassuring, he added.
Part of a BIS report published last week said that the recent implosions in cryptocurrency markets were an indication that the dangers of decentralized digital money, long warned about, were now materializing.
Those crashes are not expected to cause a systemic crisis in the way bad loans triggered the global financial meltdown. But Carstens stressed that the losses would be considerable and that the opaque nature of the crypto universe fueled the uncertainty.
The Mexican acknowledged that although many global central banks and the BIS itself had significantly underestimated how quickly global inflation had soared in the last six to 12 months, they were not about to lose their hard-won credibility overnight. the morning.
“Yes, you can argue here a bit about a timing error of certain actions and the responses of the central banks. But overall, I think the central banks have responded strongly in a very nimble way,” Carstens said. “My perception is that the central banks will prevail at the end of the day, and that would be good for their credibility.”
