The Bank for International Settlements (BIS), the global central bank umbrella body, has softened its stance on inflation, citing recent progress as encouraging. However, the BIS emphasized that central banks still face challenges and are not entirely out of the woods.
Global economic data indicates a shift from multi-decade highs in inflation, driven by the post-COVID-19 rebound and energy price spikes. Money markets are pricing in significant rate cuts from the U.S. Federal Reserve and European Central Bank next year, with expectations for the first moves in the first half of 2024.
Despite the positive outlook, Claudio Borio, head of BIS’s monetary and economics unit, stressed that the situation remains uncertain, and central banks must stay vigilant. Borio mentioned that central banks are focused on bringing inflation down but need to be “flexible and nimble” in response to a potential slowing global economy.
He highlighted the looming “unfolding of credit risk” following the rise in borrowing costs and acknowledged the measured market reaction to October’s Middle East tensions. The BIS’s quarterly report delves into various issues in global finance, including the buy-now-pay-later (BNPL) sector in the consumer credit market.
BNPL, popular for offering instalment payments on products, faces scrutiny in some major economies. The BIS noted its growth due to very low interest rates and questioned its resilience in a more challenging environment.
Hyun Song Shin, head of research at the BIS, commented on the shift from the era of ultra-low interest rates, stating that central banks are conscious of the risks and will maintain interest rates as needed to control inflation. The duration of this approach remains uncertain, adding to the ongoing market and central bank tug-of-war on interest rate projections.
