BIS warns of post-crisis inflation
June 30, 2009
By Simone Meier Frankfurt
There is a risk that central banks will raise interest rates and withdraw emergency liquidity too late, triggering inflation, according to the Bank for International Settlements (BIS).
History shows that policy makers "have a tendency to be late, tightening slowly for fear of doing it prematurely or too severely", the BIS, which oversees central banks, says in its annual report, published yesterday in Basel, Switzerland.
"Because their current expansionary actions were prompted by a nearly catastrophic crisis, central bankers' fears of reversing too quickly are likely to be particularly intense, increasing the risk that they will tighten too late."
Central banks around the globe have cut borrowing costs to record lows and injected billions of dollars into the financial system to counter the recession.
While some policy makers have stressed the need to withdraw the emergency measures as soon as the economy improves, the US Federal Reserve, the Bank of England and the European Central Bank (ECB) are still implementing asset purchase programmes designed to unblock credit markets and revive growth.
"The big and justifiable worry is that, before it can be reversed, the dramatic easing will translate into growth in the broader monetary and credit aggregates," said the BIS. That would "lead to inflation that feeds inflation expectations,or it may fuel yet another asset price bubble, sowing the seeds of the next financial boom-bust cycle".
Joerg Kraemer, the chief economist at Commerzbank, said: "If central bankers succeed in adopting exit strategies at the right time without fuelling inflation or choking the economic recovery, they'll be heroes.
"It will be a challenge."
BIS general manager Jaime Caruana said: "True, one risk is exiting too early. But experience suggests that the bigger risk is exiting too late and too slowly." - Bloomberg
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