The Bank for International Settlements issued a warning on Sunday, citing the possibility of turmoil in the world financial markets due to high levels of public debt and several significant elections this year.
The BIS, sometimes known as the central bankers’ bank, declared that the global economy was now headed towards the “smooth landing” that many economists had questioned when interest rates spiked, but caution was advised for policymakers, particularly politicians.
Elections entail hazards; the U.S. presidential vote in November, recent elections in Mexico and South Africa, and those in France and Britain this coming week are just a few examples. The global government debt is already at record levels.
According to Agustin Carstens, general manager of BIS, economic stimulus measures, a general rise in protectionism, and cost constraints from ageing populations, climate change, and rebuilding defense capabilities could upset sensitive markets because interest rates are not likely to return to ultra-low levels.
Carstens remarked, “They can surprise you with not much notice,” alluding to the volatility in British markets that followed then-prime minister Liz Truss’s budget proposals that threatened to collapse certain pension funds.
“You really want to avoid that.”
In addition to ongoing worries about the amount of debt in the United States, the French debt risk premium has increased this month to the highest level since the 2022 euro zone crisis following the announcement by French President Emmanuel Macron of a snap parliamentary election that could result in the formation of a far-right government on Sunday.
Laptops 1000Carstens stated that although the message was clear, the BIS was not criticizing “one or two” governments.
“They (governments) must cut short the rise in public debt and accept that interest rates may not return to the pre-pandemic ultra-low levels,” he stated. “We need a solid foundation to build upon”.
FIGHT OF INFLATION
The good news is that central banks are effectively managing inflation, which had spiked to record highs following the COVID-19 epidemic and Russia’s invasion of Ukraine in 2022, which shook the commodity markets.
As the BIS released its annual report, the former governor of the central bank of Mexico told reporters, “I have to say we are in a much better place than we were last year.”
Carstens compared the fight against inflation to taking antibiotics to treat a disease, and while he acknowledged that central banks should be commended for navigating a challenging path that could have led to a wave of recessions, he also warned that they needed to persevere.
In an “extreme” scenario he outlined, inflation shoots back up and more rate hikes are required by central banks.
However, the BIS do not anticipate that.
Nonetheless, the BIS report stated that central banks shouldn’t slash interest rates hastily.
“A premature easing could reignite inflationary pressures and force a costly policy reversal,” it warned.
