Bank of England and other central banks must keep interest rates ‘higher for longer’ to crush inflation

One of the world’s top economic institutions has cautioned that the fight against raging inflation by the Bank of England and the rest of the world’s leading monetary authorities “is not yet done.”

The Bank for International Settlements (BIS), frequently referred to as the “central bank of central banks,” stated in its annual review on the status of the world economy issued today that inflation risks staying higher for longer if monetary authorities let off the brake too soon.

The warning comes as the Bank of England raised interest rates last week by 50 basis points to 5%, marking its 13th consecutive increase as a result of persistently high inflation.

The nine-person committee that determines Britain’s official borrowing costs, led by Governor Andrew Bailey, is expected to raise rates to over 6%, according to financial markets.

The BIS stated in its annual economic report that “the job is not yet done,” despite the fact that the central bank’s response to the inflation increase had been robust and had already begun to show results.

According to the research, policy rates “may need to remain higher for longer in order to ensure that inflation continues to decline and stays low.”

“The key policy challenge today remains fully taming inflation, and the last mile is typically the hardest,” said Agustn Carstens, general manager of the BIS. Although there are many people bearing the strain, the long-term risks of inaction are larger.

The rate of monetary policy tightening by other central banks has increased at the fastest rate in forty years. In less than a year, the Federal Open Market Committee, led by Federal Reserve Chairman Jerome Powell, increased rates from near zero to a range of 5% and 5.25 %.

The highest rate-hike cycle in the more than 20-year history of the monetary authority has been presided over by Christine Lagarde, chief of the European Central Bank. Rates in the eurozone are now 3.5%, up from a negative level in July 2022.

Workers who want and receive wage increases that exceed inflation run the risk of forcing excessive costs into business budgets, which would encourage them to raise prices.

In the UK, wage growth has trailed behind inflation for more than a year and a half. According to TUC study released today, top earners are mostly receiving pay increases that are higher than inflation.

wage price escalation

“The crucial question will be whether businesses absorb the extra costs or pass them on if wages do catch up. This second potential shouldn’t be undervalued because enterprises have rediscovered pricing power, the BIS warned.

Supermarkets have been accused more than other businesses of trying to increase their profit margins by inflating prices. Over the past year, there has been an increase in food costs of more than 18%.

The BIS, based in Switzerland, claimed that in order to help central banks battle inflation, governments must either cut expenditure or raise taxes.

“Fiscal policy needs to consolidate in order to play its part. The organization stated that consolidation will help address both short-term and long-term problems, and that the advanced economies’ growing deficits are on an unsustainable track and call for some balance.

Raising taxes and cutting government expenditure would both increase the adverse demand effects central banks are seeking to create by raising interest rates.

The Office for National Statistics released data this week showing that for the first time since 1961, Britain’s total debt has grown to exceed the size of the entire economy.

The autumn statement won’t include a tax decrease, Prime Minister Rishi Sunak and Chancellor Jeremy Hunt hinted earlier this week. To sway voters ahead of the upcoming general election, which must take place by January 2025, there is growing anticipation that the couple would propose cuts.

Due to Britain’s failing public balance sheet, Labour has scaled back its intentions to invest £28 billion in the UK’s green economy should it win the next election.

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