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Conflicts, climate change, and trade tensions are expected to prompt central banks to implement more aggressive interest rate hikes in the face of future inflationary pressures, a senior official at the Bank for International Settlements has stated.
Andréa Maechler, deputy general manager at the Basel-based institution representing central banks, emphasized that policymakers can no longer ignore short-term price spikes resulting from disruptions to the economy’s supply side, such as crop failures, port blockages, fluctuations in commodity prices, or refinery shutdowns.
Given the increasing geopolitical risks, more frequent natural disasters, and the challenging transition to sustainable technologies, Maechler highlighted the potential need for adjustments in monetary policy to combat inflation.
She remarked, “This may necessitate decisive monetary tightening to ensure that inflation expectations remain stable.”
These remarks were made amid escalating tensions in the Middle East, which have led to a surge in oil prices, and concerns over potential inflationary impacts of prolonged strikes by US dockworkers.
Maechler also pointed out that demographic shifts and increasing protectionism may hinder economies’ ability to adapt to such disruptions, making labor shortages more prevalent and limiting the effectiveness of global trade as a buffer against domestic inflation.
Reflecting on trends following the Covid-19 pandemic, Maechler warned that additional shocks to oil or food prices, after inflation has already started to rise, could significantly impact public trust in currency stability, potentially leading to entrenched inflation.
She concluded, “All these factors suggest that inflation could become more volatile, increasing the risk of economies transitioning from low-inflation environments to high-inflation scenarios.”
The BIS has been known for its cautious stance, cautioning central banks since 2010 about the risks associated with prolonged ultra-low interest rates. This warning proved prescient during the eurozone debt crisis, which forced the ECB to further lower rates into negative territory for nearly a decade.
Recent years have seen central banks raise interest rates to their highest levels since the global financial crisis in response to surging prices fueled by post-pandemic demand, supply chain disruptions, and geopolitical events such as the Russia-Ukraine conflict.
While the Fed, ECB, and Bank of England are optimistic about inflation easing, signaling possible rate cuts in the near future, policymakers have indicated that interest rates are unlikely to return to pre-pandemic lows.