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Central banks should not rush to cut policy rates too quickly, but should adjust the pace of reductions based on emerging evidence, urged Agustín Carstens, director general of the Bank for International Settlements (BIS). in English).
During the Geneva Association Investment Directors Conference 2024, the former governor of the Bank of Mexico (Banxico) warned that asset managers and financial institutions must be prepared to deal with an environment of consistently higher real rates in the long term.
“Central banks must be prepared to deal with persistently higher inflationary pressures. Higher interest rates may be needed to keep inflation at the target level,” he explained.
“That is, the natural interest rate, when monetary policy does not boost or slow down the economy, can be higher now than before the pandemic,” he added.
However, he highlighted that inflation is falling significantly, prompting decisive measures by central banks to restore price stability, slow down aggregate demand and avoid the transition to a high inflation regime.
“In fact, the balance of risks is tilting more to the downside in major advanced economies, although some emerging market economies still face significant challenges in controlling inflation,” he said.
He highlighted that the combination of a significant demand stimulus, added during the pandemic; widespread supply restrictions due to lockdowns and related measures; as well as the energy price shock resulting from the Russian invasion of Ukraine, in early 2022; triggered the largest global inflationary outbreak in more than 40 years.
Compared with previous inflationary outbreaks, its response was more timely and decisive, inflation is falling and its decline has a surprisingly small cost to economic activity.
What does all this mean for monetary policy going forward?
Carstens noted that while the direction of policy is now clearer in most countries, the appropriate size and pace of easing remains quite uncertain, for several reasons.
“There is greater confidence that economies are now cooling and that inflation is converging towards target; However, some uncertainty remains regarding the extent of the slowdown,” he concluded.
