The Bank for International Settlement (BIS)’s annual report claimed on Tuesday that policy makers would find it dauntingly challenging to recalibrate the fiscal and monetary stimulus because of an uneven global recovery from the Ccovid-19 crisis.
The BIS predicted its best scenario to be that of a strong global economic recovery but with varying speeds for various countries, said the Swiss-based bank that is dubbed the central bank to world’s central banks.
Two alternative scenarios were set out by the bank. One of the scenarios involve imparting of large fiscal stimulus and a drawdown of accumulated savings resulting in stronger growth but also accompanied with higher inflation and a significant tightening in the global financial conditions. The other scenario predicts disappointing global economic growth with the pandemic turning out to be harder to bring under control.
“While the recovery is under way and the central scenario is relatively benign, we are not out of the woods yet,” BIS head Agustin Carstens said.
The emerging market countries could be faced with significant difficulties because of the uneven recovery, particularly if the inflation remains high, which would prompt major central banks such as United States Federal Reserve to begin fiscal tightening and seek to increase interest rates.
It was healthy to see that some emerging market countries were already raising their interest rates as a response to rising rates of inflation, said Carstens, who headed Mexico’s central bank before joining the BIS, but also stressed that the advanced economies would likely wait for some more time prior to taking such a decision.
“It would not be appropriate to tighten monetary policy today just to reduce measured inflation and sacrifice a recovery of the economy,” Carstens said. “Is that something (major) central banks would want to do today? I don’t think so.”
He rather forecast a more time periods of “noisiness” in the global financial markets following the volatility in bond and equity prices between January and March when investors were prompted to predict a tapering of Fed support because of vaccination programmes.
“The main challenge (for the rest of the year) is how to co-ordinate market expectations with the conduct of policy.” Carstens said. “I think one of the hiccups we saw in the last months was the market going ahead of the Fed.”
The crucial element is to ascertain whether the current spell of inflation will persist or will be only be temporary in nature. “As of today, we at the BIS consider that it will most likely be temporary,” Carstens said, citing base effects and that supply bottlenecks that have also pushed up prices should dissipate.
It would not be easy for normalization of fiscal and monetary policies as fiscal and monetary policies in the longer run. Public debt has risen to post-World War II peaks. Similarly, the balance sheets of central banks have also only rarely reached similar heights – and that too only during war times.
“The uneven recovery creates daunting challenges for policymakers,” the BIS report said.
“The sustainability of debt can change if interest rates start increasing, Carstens added. “you don’t want to be surprised.”
(Adapted from Reuters.com)