Central banks’ central bank less hawkish, but ‘the job is not done yet’

London — Global central bank umbrella body, the Bank for International Settlements (BIS), eased its hardline stance on inflation on Monday, calling recent progress encouraging. But it stressed that central banks are not out of the woods yet.

Global economic data has begun to show a clear trend that multidecade highs in inflation — caused by the rebound from the Covid-19 pandemic and a spike in energy prices — are in the rearview mirror.

Money markets are pricing in more than 100 basis points of rate cuts from the US Federal Reserve (Fed) and European Central Bank (ECB) in 2024 and have shifted the expected timing of the first moves firmly into the first half.

The pace of that shift has left some policymakers uncomfortable and for the BIS, which hosts closed-door meetings of the world’s top central bankers, there is a balance to strike. “The outlook has improved but the key point we have to bear in mind is that we are not out of the woods and that the job has to be done,” Claudio Borio, the head of BIS’s monetary and economics unit, said.

Central banks are proving “laser-focused” in bringing inflation down, Borio added, but in a further sign of the softening rhetoric he said they need to be “flexible and nimble” if a slowing global economy requires it.

“Unfolding of credit risk” after the huge rise in borrowing costs is still to come, he said, though the measured reaction of markets to October’s rise in Middle East tensions after Hamas’ attack on Israel is reassuring.

The quarterly report from the BIS, often dubbed the central bankers’ central bank, looked a number of specific issues bubbling under the surface in global finance.

One of those is a corner of the consumer credit market known as “buy now pay later”, which has grown in popularity in recent years. Paying by instalments for consumers to buy clothes and other products has faced crackdowns in some major economies already.

The BIS said the sector, which remains relatively small and no threat to the wider financial system, thrived because of very low interest rates.

“It remains to be seen how well they will do in this much more challenging environment, and I think it will be reasonable to conjecture that once you don’t have this favourable combination, that they will not do as well,” said Hyun Song Shin, head of research at the BIS.

Speaking more broadly, Borio reiterated that the era of ultralow interest rates has been “left behind”, though there is clearly a tug-of-war about where markets and central bankers think interest rates will start to level out.

Central banks “are well aware of the risks and they will keep interest rates up as long as it is needed in order to get inflation down”, Borio said. “We will see exactly how long that will have to be.”

Reuters