The Bank for International Settlements has just warned global investors about the possibility of continued high interest rates. The BIS cautioned that continued high inflation would likely force the Federal Reserve and other central banks to keep rates at the current higher levels.
Justification for high interest rates
As Reuters noted in its report, markets around the world have been unfazed by recent chaos in the banking system and persistently high inflation. BIS monetary and economics unit head Claudio Borio sees a disconnect between central bank decisions and the markets’ reaction. According to Borio:
“Clearly there are still some residual differences between what financial markets are seeing and the communication that has come from central banks”
Borio suggested that markets may be making decisions based on decades of inflation and interest rate history. Prior to the recent surge in inflation and subsequent high interest rates, many areas of the world enjoyed near-zero rates. Borio apparently believes that market experts have been assuming transitive inflation and a quick return to normal interest rates.
Stubborn inflation could force rates to remain high
Borio’s warning may offer a more reasonable path forward for businesses and markets trying to make sense of the current economic climate. He said that people should be alert to the possibility that rising prices may prove hard to rein in. If that ends up being true, he warned:
“[B]usiness models, trading strategies, that were predicated on that assumption are particularly vulnerable to current conditions.”
Still, those high interest rates are only one area of concern identified by the BIS. Borio also expressed concern about the resilience of the world’s financial system. He cited worries about areas of the financial sector that were relying on lower U.S. interest rates. In addition, he noted concerns about the impact higher borrowing costs could have on businesses and homeowners.