BIS "Risk of Inflation Rebound... Central Banks Should Not Rush Rate Cuts"

"Concerns Over Inflation Stimulated by Rising Service Prices and Wages"

Following Europe, global financial markets are focusing on the timing of the U.S. interest rate cuts, amid which the Bank for International Settlements (BIS) has issued a warning that central banks around the world should be cautious about lowering rates due to the risk of inflation rebounding.

According to major foreign media on the 30th of last month (local time), BIS urged central bank policymakers in its recent annual report to "set a high bar for policy easing." This is due to the risk of inflation rising again because of a rebound in service prices and wage growth.

BIS explained, "Early rate cuts could reignite inflationary pressures and force costly policy reversals," adding that "(if inflation rebounds) trust could be damaged, making policy reversals more expensive."

According to BIS analysis, service prices related to core commodity prices have fallen to pre-pandemic levels in many countries. Real wages related to goods and services prices also declined during the inflation surge. BIS estimates that if wage increases to offset the inflation surge occur rapidly, the inflation rate in the Eurozone (20 countries using the euro) could rise by an additional 1.5 percentage points in 2025 and 2.5 percentage points in 2026.

Furthermore, BIS suggested that central banks should be cautious about early rate cuts to keep room for lowering borrowing costs in preparation for a sudden economic downturn.

This warning came as some advanced countries have started cutting rates. The European Central Bank (ECB), as well as the central banks of Canada, Switzerland, and Sweden, have recently begun lowering rates. The U.S. Federal Reserve (Fed) is also expected to start cutting rates as early as September.

Agust?n Carstens, BIS General Manager, emphasized, "Strong tightening has reinforced central bank credibility and prevented a shift to a high inflation regime," adding, "(Without treating the whole problem with high-intensity tightening) inflation could return."

BIS sees a high likelihood of a soft landing for the global economy, with inflation cooling and growth rates maintaining resilience. However, it identified vulnerable government finances, low productivity, and the possibility of inflation rebounding as risk factors that could hinder a soft landing. In particular, it pointed out that a sharp increase in public debt could significantly undermine monetary and financial market stability.

Additionally, BIS predicted that the financial markets could still face shocks due to the accumulated high-intensity tightening. Typically, financial stress occurs 2 to 3 years after the start of rate hikes, so next year's financial market situation cannot be taken lightly. The commercial real estate crisis is also not over, and it is forecasted that a sharp decline in real estate values could lead to a 12 percentage point drop in advanced countries' lending and a 4 percentage point decline in gross domestic product (GDP).