Central banks may need to raise interest rates more forcefully than so far to keep inflationary pressures in check and it is unclear how high they must go, the Bank for International Settlements said on Monday.
Prospects that the US Federal Reserve, the European Central Bank and the Bank of Japan may be raising rates at roughly the same time may unsettle financial markets and hurt global demand, said BIS General Manager Malcolm Knight.
But with the inflation outlook turning more uncertain, costlier credit is needed to keep healthy global growth on track, he said in releasing the BIS annual report. "At some point, central banks may well have to act more forcefully than they have needed to in the past few years," he said.
Markets expect the Fed, which meets this week, to signal it may raise rates beyond the 5 percent level it has reached in a series of increases over the past two years. The Bank of Japan could start tightening in the next few months and the ECB has already raised rates three times in the past six months.
"We are in a changing situation, and I see in some of the recent data that inflation expectations in some countries may possibly be a little less well-anchored than they were only a few months ago," Knight told a news conference. "That may have implications for the policy actions."
The warning to markets that world rates may keep on climbing followed three days of meetings of monetary officials from over 100 countries.
The BIS, which acts as a bank and research institute for central banks, said costlier money should secure healthy world growth, estimated at 4.4 percent this year. Central bankers attending the meetings expressed similar views to International Monetary Fund Managing Director Rodrigo Rato, who called costlier credit a "welcome step".
CHEAP CASH OVER:
For nearly four years, the global economy has been awash in cheap cash pumped into markets after the 2001 stock market crash. With the ECB signalling it plans further rate hikes and Bank of Japan possibly raising rates as early as July, markets have started to adjust to costlier financing conditions.
Investors have pulled out of riskier assets over the past six weeks, causing some stocks markets to tumble 20 percent from peaks earlier this year, commodities to slide and some emerging market currencies to tumble.
The dollar rallied on Monday and stocks were mixed on prospects that the Fed, which is widely expected to raise rates to 5.25 percent on Thursday, may signal further tightening. Knight called these recent market jitters a "healthy phenomenon" as investors re-evaluate risk which has long been underpriced. But he acknowledged the shift toward higher global rates may not prove entirely smooth.
For China, where the economy is roaring ahead at a 10.3 percent annual rate, central bank Governor Zhou Xiaochuan said action will be needed to keep the economy on track. Already the central bank raised rates in April and this month increased bank reserves to tighten credit conditions.
"The economy is doing well. We are going to have some policy adjustment to get a better structure. And also (we are) tightening a little bit monetary policy," Zhou told reporters.
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