Central Banks should be worried about inflation ...

money.jpgAt least according to the Bank of International Settlements (BIS). As always I have tried to frame the text with the use of 'bold' letters and headers to the quotes. 

CBs need to be hawkish on inflation; notice especially the BIS' implicit presentation of the excess liquidity narrative and even stagflation; i.e. the 'twin perils.' 

'Central banks will have to move faster to raise interest rates because global inflationary pressures are rising and the economy remains vulnerable to a “bang” of market turbulence, the Bank of International Settlements warned on Monday.

Raising the spectre of stagflation – the twin perils of slow economic growth alongside higher inflation – the central bankers’ bank highlighted the threats that now exist after global interest rates have been “unusually low for an unusually long time”.

Malcolm Knight, BIS general manager, said: “It would be imprudent to count on the happy combination of strong growth and low inflation lasting indefinitely. At some point, central banks may well have to act more forcefully on policy rates than they have needed to do in the past few years”.

Its annual report warned the coming year would not be easy for central banks, which would need to act tough to stamp out inflationary pressures but not go too far lest they risk a recession.'


The deflationary pressure levied by emerging economies have permitted CBs to keep interest rates too low for too long resulting in excess liquidity. The question obviously is whether emerging economies such as for example China will continue to export deflation? But more on that tomorrow :).  

'The problem diagnosed by the BIS was that globalisation helped bring inflation down to extremely low levels after the 1980s but ever cheaper imports masked other problems in advanced economies.

The BIS worries that central bankers worldwide kept interest rates too low for too long, allowing asset prices to surge and global trade imbalances to reach unprecedented levels. These potential mistakes were compounded by central banks in Asia, particularly China, artificially preventing exchange rates from appreciating.

The immediate consequence for advanced economies is rising inflationary pressure now import prices are no longer falling. But the nagging longer term threat is the unwinding of the huge trade imbalances embodied in the US current account deficit and huge surpluses in China, Japan, Germany and oil exporters.

My personal view on all this is very much wait and see ... I have critized the ECB for raising in the context of a fragile Germany economy; how far can the ECB actually go here? In terms of the BOJ I very much doubt that we will see any substantial raising. Which brings us to the Fed and many pundits argue that Bernanke has gotten the jitters but in the end I do not want to be the judge here. In any case, the dollar won't move to correct the global imbalances unless the Euro or Yen can take it an so far this is hard to see I think. In terms of advanced economies importing inflation/deflation from emering economies (China) I will return to that in my next post, so until then :).