Interest rates will need to remain high for years, top central bank warns

Disruption of trade routes in the Red Sea threatens to prolong inflationary pressures. Photo: Syed Hassan/Getty Images Europe

Persistent inflation means centralization Banks around the world will be forced to maintain high interest rates for years to come as they grapple with wage demands, military and trade disputes, the Bank for International Settlements (BIS) said.

Inflation is falling “but the job is not done,” warned the institution, often known as the central bank for central banks.

Rising service prices are proving “stubborn” in many countries around the world , even as commodity inflation has eased following the supply chain chaos caused by the pandemic and the energy price shock that accompanied Russia's invasion of Ukraine.

The BIS warned that if service price pressures persist, central banks will be forced to tighten monetary policy to meet inflation targets.

There is also a longer-term threat from disruption to trade routes and the end of the wave globalization, which helped reduce costs in the early years of this century, the organization added.

It says: “Climate Change could lead to higher commodity prices due to more severe weather or drought-related restrictions on freight transport on waterways.

“Geopolitical tensions could increase these pressures, including by reorganizing global value chains. This means that, all other things being equal, service price increases may need to be much lower than in the decades preceding the pandemic to achieve inflation targets.”

Breakthroughs in recent years have come in the form of the US-China trade war, pandemic shipping disruptions and Houthi attacks on ships in the Red Sea.

The prospect of long-term turmoil raises the possibility that central banks will have to keep interest rates high rates for many years to come to cope with inflationary pressures in the services sector.

An aging population also threatens growth. wages and thus support high prices for services.

Claudio Borio of BIS said globalization could no longer help lower costs.

Globalization previously curbed inflation by opening Western markets to cheap labor in poor countries, he said.

G- Borio added: “This factor tends to decline over time, and all else being equal, we expect inflation tailwinds to become headwinds.”

Hugh Pill, the Bank of England's chief economist, said last week that interest rate cuts would remain «somewhat» even if inflation fell below 2% in the spring.

«Although I accept that we are now «We are seeing early signs of a downward shift in the persistent component of inflation dynamics, but these signs remain preliminary,» he said, cautioning that there is not yet sufficient evidence that the inflation threat has been completely overcome, based on service prices, wages and the broader labor market .

UK inflation remains at 4%, double the Bank of England's target of 2%. The Bank's base rate is 5.25% and policymakers are unsure what to do next.

At a meeting of the nine-member Monetary Policy Committee last month, six officials, including Andrew Bailey, manager, and Mr. Pill, voted to maintain the rates, two members voted for an increase to 5.5% and one for a decrease to 5%.