Countries around the world are facing a dangerous cocktail of high inflation, slowing economic growth and heightened financial vulnerabilities, the Bank for International Settlements warned in its annual report
Many economies are approaching a tipping point where high inflation becomes normal while economic growth slows sharply, the Bank for International Settlements warned in its annual report published Sunday.
“We may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched. This would mean a major paradigm shift,” the BIS said.Central banks around the world have stepped up the pace of interest rate increases in recent months to try to tame inflation. Two weeks ago, the U.S. Federal Reserve announced the largest interest rate hike since 1994.
Getting inflation under control won’t be easy, the organization warned. The recent commodity price shock tied to Russia’s invasion of Ukraine has added to multiple inflationary pressures that have been building over the past year. This resembles the oil price shocks in the 1970s that pushed the United States, Canada and other countries into a period of high inflation, high unemployment and low economic growth known as stagflation.
The BIS poured cold water on the probability of a soft landing in its report. BIS economists looked at monetary policy tightening cycles in 35 countries between 1985 and 2018, and concluded that about half of them resulted in a soft landing – that is, did not end in a recession. The BIS is not alone in its grim prognosis. Earlier this month, the World Bank cut its 2022 global growth forecast to 2.9 per cent from a 4.1-per-cent forecast in January, and said that “the danger of stagflation is considerable today.”
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