September 27, 2023
Central bank regulator warns that stubborn inflation poses risks to financial stability

The Bank of International Settlements warned that markets should not fall into the trap of thinking that inflation is coming down decisively.

In its quarterly review, the Swiss-based organisation, known as the ‘central bank for central banks’, warned of difficulties in financial markets if stubborn inflation forces interest rates higher. Can.

“The risk that inflation may be more stubborn than expected is something we should not dismiss,” said Claudio Borio, chief economist at the Bank of International Settlements.

“Business models, trading strategies, that were based on the assumption (of rates coming down rapidly) are particularly vulnerable to the current circumstances,” he said.

Markets are becoming increasingly confident that central banks have reached the end of their monetary tightening cycles, with traders expecting a rate cut in the second half of next year.

However, the headline inflation rate in the US increased in August due to rising energy prices. Inflation is expected to increase slightly in Britain when the latest figures come on Wednesday.

These pressures may force banks to keep rates high for a longer period of time or even raise rates again.

“Inflation could rise dramatically again,” Borio said. “Central banks are aware of the potential risks. “It is about whether financial markets are taking these risks into account appropriately.”

Borio highlighted that higher interest rates could have an impact in the form of a decline in property prices and an increase in bankruptcies as banks restrict access to credit.

“Credit growth in general is slowing down and asset prices, particularly I would say property prices, have started to fall,” Borio said.

“The question is how resilient the overall financial system will be to absorb those losses. And especially how large and persistent those losses are going to be,” he said.


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