But rising prices continue, forcing monetary policy makers to raise interest rates rapidly.
The BIS, which is considered the central bank of central banks, said: “It is possible to reach a turning point beyond which inflationary psychology is spreading and gaining ground. That would mean a big paradigm shift. “
The Bank of England has warned of the risk of a spiral in wages and prices as workers push for wage increases to chase inflation, which in turn increases the costs facing businesses.
The BIS said this could happen if inflation rises large enough and sustained to “leave a big imprint on the lives of workers and companies”, but also warned central banks not to wait for clear evidence. before acting.
The report said: “On time [wage price spirals] are clearly visible, inflation may already be rising. “
But the institution warned that central bankers must also be careful to pursue a so-called “soft landing,” in which the economy slows and inflation is controlled without causing a recession.
However, history shows that this is difficult, and if central banks do not raise interest rates enough, then the BIS report says they can let inflation escape.
“Tightening too tight and too fast can cause unnecessary damage. But if too little is done, it would increase the prospect of more and more expensive road tightening, “BIS said.
“Delaying the necessary adjustment increases the likelihood of even larger and more expensive future interest rate increases, especially if inflation is fixed in household and corporate behavior and inflation expectations.”
An additional risk is that years of low interest rates have led to rising asset prices, including houses, stocks and bonds, with debt levels rising even during a pandemic.
“Tighter monetary conditions needed to reduce inflation could call into question assets – including housing – at a perfect price, assuming consistently low real interest rates,” the BIS said.
“During this phase, bad economic times, when the prices of riskier assets such as stocks usually fall, were usually met with monetary relief, which raised bond prices. But when inflation is high, the economic downturn is more likely to be caused by tighter monetary conditions, which will lead to lower bond and stock prices.
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