"Critical Juncture in Inflation Battle, Interest Rates Must Rise Further... Pressure to Prevent Bank Crisis Recurrence"

BIS Warns of Prolonged High Interest Rates in Annual Report

The Bank for International Settlements (BIS) assessed on the 25th (local time) that despite the tightening measures taken by central banks around the world over the past 18 months, inflation remains at a high level, and additional interest rate hikes are necessary. It warned that the soaring cost of financial funding, reaching the highest level in 15 years, and increased banking vulnerabilities are raising risks to the financial system.

In its annual report published that day, BIS stated, "The global economy is at a critical crossroads in the fight against inflation," adding, "The era of obsession with short-term growth is over. Monetary policy should focus on price stability, and public spending must be reduced." Although the benchmark interest rates in the US and Europe have risen to 5.25% and 4.0%, respectively, following several rate hikes to curb soaring prices, BIS explained that this is still insufficient.

In particular, BIS pointed out that companies seeking to maximize profits by citing rising raw material and labor costs are rushing to raise product prices, and workers' demands for wage increases are continuing, thereby sustaining the high inflation situation.

BIS diagnosed that the world is facing a challenge where inflation and financial vulnerabilities coexist for the first time since World War II. It also predicted that if prices continue to rise, bank stress will increase further.

BIS emphasized, "The cost of financial funding, which has soared to the highest level in 15 years since the 2008 global financial crisis, is increasing the likelihood of a recurrence of financial sector risks such as the banking crisis triggered by Silicon Valley Bank (SVB) in March." It added, "While a soft landing with rising interest rates that does not trigger a recession or a large-scale banking crisis is still not impossible, it is a difficult situation."

US Treasury Secretary Janet Yellen also mentioned the possibility of renewed turmoil in the banking sector. In an interview with the Wall Street Journal (WSJ) on the 23rd, Secretary Yellen said, "High benchmark interest rates and the collapse of regional banks in March will reduce the profits of small and medium-sized banks," adding, "Due to the commercial real estate issue, which is considered a new trigger that could reignite a banking crisis, news of additional mergers and acquisitions among US banks may emerge within the year."

However, she said, "While a crisis like that of March will not recur, the deterioration of banks' second-quarter earnings this year will increase downward pressure on stock prices," and "Although it is not a major threat to the banking sector as a whole, a situation will arise where banks seeking mergers will appear." The WSJ analyzed that Yellen's remarks are a clear signal that US government authorities are preparing for the possibility of renewed turmoil in the banking sector.

BIS recommended raising taxes and reducing public spending to cool the global economy and lower the risk of a financial crisis. It warned that if governments do not reduce fiscal spending, by around 2050, the debt-to-GDP ratios of advanced and emerging countries will exceed 200% and 150%, respectively, and if economic growth slows, debt ratios will rise even further.

In particular, it pointed out, "Governments and central banks should avoid approaches that try to solve all social problems through fiscal stimulus by increasing public spending," and emphasized, "They must recognize that fragile public finances ultimately impair a country's ability to respond to crises."

This content was produced with the assistance of AI translation services.