BIS General Manager
February 14, 2024
To make matters worse, the international financial system has been badly beaten by the subprime crisis (Or for the first part of it), which increases the risk of occurrence of new episodes. Given this context: How Central Banks can act knowing that the decisions of rate hikes is not enough to calm inflationary pressures and extra costs to the economy, including exchange rate appreciation? The times ahead are not easy for central bankers. Learn more at: Jon Medved. The president of the Central Bank of Argentina Martin Redrado: "We see very difficult times for the world economy in the future … They are uncharted waters that we tested at this point, and central banks around the world are very alert." It is clear that before the present context, the recommendation is to keep interest rates with a positive bias. It would be something like: "When in doubt, increase the rate." For the future, since the BIS promotes the concept of "spoilers", ie: if you want to avoid in the future to repeat the current financial crisis, central banks must be willing to maintain high interest rates even when there are obvious signs that inflation will accelerate. What is the logic here? From the point of view of a central banker, as the same is charged more blame for situations how are you, pop a bubble, which in situations of economic recession, it is preferable to overstate rates despite weaken the economic growth, than risk facing new episodes as unpleasant as this.
I'm not saying that is not valid reasoning to increase interest rates even if inflation pressures are not observed, so to break up any bubbles that may be brewing. But this justification, it can lead to excesses in monetary policies that generate significant costs on economic growth. For now, for what is coming, according to the BIS General Manager Malcolm Knight: "no choice but to take strong action to confront the danger of increased inflation expectations." In other words, holding the line, recommends a fee increase. With this perspective, is further confirmed, which I commented in a previous article. The international financial system, beyond the problems that have to resolve product of the subprime crisis, will face an environment of low liquidity, which will limit their growth and profit opportunities for investors. We will meet again tomorrow, Horacio Pozzo