Call to raise global interest rates

GLOBAL interest rates must rise to avoid high inflation becoming entrenched, the Bank for International Settlements (BIS) said yesterday.

The body also warned that delaying deficit cuts could risk intensifying the sovereign debt crisis and could have grave consequences were investors to lose confidence in a major economy such as the US.

“With the arrival of sharper price increases for food, energy and other commodities, inflation has become a global concern,” the BIS said in its annual report.

“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” it added.

Of the four major central banks, the European Central Bank (ECB) is the only one which has raised rates since the intensification of the financial crisis in late 2008.

Central banks may have to raise rates at a faster pace than previously, the BIS said, adding that as long as global growth is robust, food and commodity prices may remain high or even rise further.

The Group of 20 economic powers agreed in Paris last Thursday to tackle high food prices by boosting farm output, food market transparency and policy co-ordination, after world food prices hit a record high earlier this year.

The deal is another sign that global policymakers are reaching beyond traditional economic policy tools to sustain global growth, which has shown signs of a slowdown in recent months.

The BIS said inflation expectations suggest central banks’ long-term credibility has so far survived the inflation surge, but added that rates have to rise to ensure this anchoring.

“The great danger is that long-term inflation expectations will start to climb, and current price developments and policy stances are sending us in the wrong direction.”

The annual report also said the Bank of England should think about tightening its policy.

“In the United Kingdom, CPI inflation had exceeded the Bank of England’s 2 percent target since December 2009,” it said.

“As yet, there has been no move by the Monetary Policy Committee, but one wonders how long its current policy can be sustained.”

The BIS said that a major economy being drawn into the debt crisis could have catastrophic consequences.

“We should make no mistake here: the market turbulence surrounding the fiscal crises in Greece, Ireland and Portugal would pale beside the devastation that would follow a loss of investor confidence in the sovereign debt of a major economy. The time for public and private consolidation is now,” it said.