Banks urged to bump up interest rate with threat of inflation high
Published 27/06/2011 | 05:00
CENTRAL banks need to start raising interest rates to contain inflation and may have to act faster than in the past, the Bank for International Settlements (BIS) said yesterday.
The BIS appeared to urge some caution on the European Central Bank about pushing up the cost of money.
Referred to as the "central banks' central bank", the BIS said that in "some advanced economies" policy tightening still needs to be balanced against the vulnerabilities associated with private and public sector balance-sheet adjustment and financial sector fragility.
In its annual report, the BIS joined the Bank of England in calling for a credible solution to the euro crisis.
"Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks," it said. "Central banks may have to be prepared to raise policy rates at a faster pace than in previous tightening episodes."
"Global inflation pressures are rising rapidly as commodity prices soar and as the global recovery runs into capacity constraints," the report said. "These increased upside risks to inflation call for higher policy rates."
By contrast, the US Federal Reserve last week repeated a pledge to keep its benchmark interest rate close to zero for an "extended period".
Minutes from the Bank of England's last policy meeting, at which the bank held its key rate at 0.5pc, showed some officials see the potential for more monetary stimulus through further bond purchases. The Bank of Japan this month held the benchmark near zero and kept its credit and asset-purchase programmes in place.
The BIS said central banks should also reduce the size of their balance sheets, though it would be "dangerous" to cut them "too rapidly".
In response to the financial crisis, the Fed and the Bank of England "sharply" increased their total assets, in each case from about 8pc of gross domestic product to just below 20pc, according to the BIS. The ECB expanded its assets from 13pc of eurozone GDP to more than 20pc.
"Balance sheet policies have supported the global economy through a very difficult crisis," the report said. "However, the (central bank) balance sheets are now exposed to greater risks -- namely interest-rate risk, exchange-rate risk and credit risk -- that could lead to financial losses."