The Bank for International Settlements (BIS) has cautioned that the global economy is at a critical juncture in the fight against inflation. The longer inflation remains high, the more severe and prolonged the necessary policy tightening will be, potentially leading to a recession.
According to Claudio Borio, the head of the BIS’s monetary and economic department, the global economy is at a critical juncture. As inflation remains elevated, the risk of a policy-induced recession grows with stronger and more prolonged policy tightening.
The BIS report identifies several factors contributing to inflation, including the war in Ukraine, rising commodity prices, and China’s economic slowdown. These factors have pushed inflation to multi-decade highs in many countries.
Central banks face a challenging trade-off in controlling inflation. Raising interest rates too quickly could risk triggering a recession, while insufficient rate increases could perpetuate entrenched inflation.
Central banks worldwide are raising interest rates to combat inflation. The US Federal Reserve has increased rates by 0.75% points in the past two months, with expectations of further rate hikes in July. Similarly, the European Central Bank is also anticipated to raise rates, potentially by more than 0.25 percentage points.
The BIS report highlights various risks to the global economy, including the possibility of a recession. Therefore, central banks must exercise great caution in their monetary policy tightening to prevent a recession from occurring.
