Uneven global recovery creates ‘daunting challenges’ for policymakers, BIS says

Dubbed the central bank to world’s central banks, the Swiss-based BIS said its main scenario was one of a solid global pick-up, albeit at varying speeds across countries.

The bank set out two alternative scenarios. One where large fiscal stimulus and a drawdown of accumulated savings results in stronger growth but also higher inflation and a substantial tightening in global financial conditions. In the other, growth disappoints as the virus proves harder to 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 uneven recovery could leave emerging market countries at the sharp end of any difficulties, especially in the higher inflation scenario, where major central banks like the U.S. Federal Reserve start looking to raise interest rates.

Carstens, who headed Mexico’s central bank before joining the BIS, said it was healthy that some emerging markets were already raising rates in response to rising inflation, but stressed he expected advanced economies to wait.

“It would not be appropriate to tighten monetary policy today just to reduce measured inflation and sacrifice a recovery of the economy,” Carstens told Reuters. “Is that something (major) central banks would want to do today? I don’t think so.”

Instead he predicted more periods of “noisiness” for financial markets after volatility in bond and equity prices between January and March, when vaccination programmes prompted investors to try to pre-empt a tapering of Fed support.

“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 key question is whether recent strong increases in inflation will be temporary or more persistent. “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.