Debt is a brake on the fight against inflation

Reuters
Reuters

(The author is a Reuters Breakingviews columnist. Opinions expressed are their own. Updates to add a graphic.)

LONDON (Reuters Breakingviews) – Central banks are in trouble. They need to raise interest rates to keep inflation from spiraling out of control, but also need to consider the effects on debt. The Bank for International Settlements on Sunday called for a “swift and decisive” interest rate hike before expectations of higher prices materialize.

However, the body that oversees the world’s central banks has also expressed concern about the effects of rising borrowing costs, given high levels of corporate and household debt (see chart https://refini. tv/39SHMP8).

The Basel-based institution calculates https://www.bis.org/publ/arpdf/ar2022e1.htm that if rates rise as financial markets currently expect, average interest payments in a dozen economies developed will increase by 1 percentage point to 16% of income. This will affect real estate and stock prices and reduce economic growth by 1.5%. If the US Federal Reserve raises rates at the same pace as it did between 2004 and 2006, the blow to incomes and growth will double. And that’s before taking into account possible financial market turbulence.

This combination of financial vulnerabilities and high inflation is “unique for post-World War II”, according to the BIS. This makes an economic “soft landing” even more difficult to achieve. (By Peter Thal Larsen)

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(Editing by George Hay and Oliver Taslic)

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