“Risk is that global inflation will continue to rise”, says BIS director

Deputy Director General of the Bank for International Settlements (BIS, a kind of central bank of central banks), Luiz Awazu Pereira da Silva sees inflation becoming systemically higher as the most important long-term risk.

According to him, this would lead to a change in the “inflationary regime”, leaving the period known as the “great moderation”.

“If the dose of tightening (high interest rates) is insufficient, or if inconsistent fiscal policies are adopted, inflation can consolidate in everyone’s expectations and become a much bigger problem”, says he, who was director of the Central Bank and secretary at the Ministry of Finance.

The following are the main excerpts from the interview:

To what extent can global inflation be imported by emerging countries this year?

The return of inflation has been a global phenomenon. Global efficiency gains that reduced local costs were reversed after the pandemic. Only in Asia has inflation remained relatively moderate, at least until recently, as in recent months there has been a significant recovery in most countries, with the exception of China and Japan.

In three out of four advanced economies, inflation exceeds 5%. In more than half of emerging markets, it is above 7%.

What are the risks ahead?

Inflation may remain high beyond this year because of supply and production problems. The conflict in Ukraine could cause further price increases for energy, food and other commodities, which would lead to further rises in prices of goods and services. If there are new lockdowns in China, it would cause additional problems in global supply chains.

The most important long-term risk is that inflation will become systemically higher, leading to a paradigm shift or inflationary regime, leaving the period known as the “great moderation”.

When inflation is low and stable, it naturally attracts less attention and its influence on wage and price formation is less.

But if price increases become more generalized, this dynamic can change, leading to an inflationary spiral in which price and wage increases feed back into each other.

How to balance this dilemma, between more inflation or a possible recession?

If central banks fail to calibrate their right dose of monetary tightening, at the right time, to try to contain short-term inflationary trends, they could end up inducing an excessive drop in activity and even a recession. And that must be avoided.

If the tightening dose is insufficient, or if inconsistent fiscal policies are adopted, inflation can consolidate in everyone’s expectations and become a much bigger problem.

The flow of foreign resources to emerging countries is increasing. Will this follow?

The volume of capital going to Russia before the war was already very small. BIS statistics show that banks had already halved their exposure to that country since 2014.

The benefit to other countries of this potential redirection of flows is not significant. More significant, in the long run, is the potential decline in capital flows to other countries. It is not impossible that, in a more geopolitically fragmented world, the flows of trade and capital will change. Some emerging markets will lose out, and others may benefit.

The information is from the newspaper. The State of São Paulo.