Central banks 'not out of the woods' in inflation battle - BIS
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[December 04, 2023] By
Marc Jones
LONDON (Reuters) - Global central bank umbrella body, the BIS, eased its
hardline stance on inflation on Monday, calling recent progress
encouraging, but stressed that central banks were not out of the woods
yet.
Global economic data has begun to show a clear trend that multi-decade
highs in inflation -- caused by the rebound from the COVID-19 pandemic
and spike in energy prices -- are in the rear-view mirror.
Money markets are pricing in over 100 basis points of rate cuts from
both the U.S. Federal Reserve and European Central Bank next year, and
have shifted the expected timing of the first moves firmly into the
first half of 2024.
The pace of that shift has left some policymakers uncomfortable and for
the Bank for International Settlements, which hosts behind-closed-doors
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 needed to be "flexible and nimble" if a slowing global economy
required it.
"Unfolding of credit risk" following the huge rise in borrowing costs
was still to come, he said, although the measured reaction of markets to
October's rise in Middle East tensions after Hamas' attack on Israel was
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.
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The tower of the headquarters of the Bank for International
Settlements (BIS) is seen in Basel, Switzerland March 18, 2021.
REUTERS/Arnd Wiegmann
One of those was a corner of the consumer credit market known as
buy-now-pay-later, or BNPL, which has grown in popularity in recent
years.
BNPL, which offers payments by installments for people 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 favorable 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 ultra-low
interest rates had been "left behind", although there was 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".
(Additional reporting by Huw Jones; editing by Christina Fincher)
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