Raise Rates Faster?
By Yaser Anwar, CSC of Equity Investment Ideas
The Bank of International Settlements, an international organization that nurtures international monetary and financial cooperation and serves as a bank for central banks, is warning the world's banks to raise interest rates at a faster pace to combat inflation and protect a vulnerable global economy, according to the Financial Times.
"The pursuit of low inflation has delivered excellent economic performance in industrialized countries over the past 20 to 30 years. However, in its annual report, the BIS ... questioned the merits of pursuing stable prices as a policy goal, saying it was insufficient to deliver stable economic performance," Reuters reports.
The BIS is warning central banks of the insurgence of stagflation - when an economy slows, but inflation rises. Stagflation is considered one of the worst, if not the worst, economic conditions to combat.
Malcolm Knight, BIS general manager, said, "It would be imprudent to count on the happy combination of strong growth and low inflation lasting indefinitely. At some point, central banks may well have to act more forcefully on policy rates than they have needed to do in the past few years."
The comments prompted investors to wonder if the Fed was going to surprise with a 50 basis point hike when it meets this week.
The BIS pointed to a combination of factors that allowed central banks to keep interest rates low and inflation contained so far. Globalization helped quell inflation because of cheap imports. However, that acted to mask domestic problems such as high deficits.
And further compounding the problem, central banks in Asia - particularly China, artificially kept the value of their currency down, which, in turn, kept prices low.
But now that raw materials prices are rising, developing countries can no longer keep prices low, which makes it difficult for advanced countries to maintain low inflation, and therefore low interest rates.
The report, says the FT, argued that "inflationary pressures might re-emerge with a vengeance and/or that the unwinding of the financial imbalances could undermine economic activity and contribute to unwelcome disinflation."
In other words, stagflation could occur if central banks don't act.
Source: Money News
http://www.equityinvestmentideas.blogspot.com/
The Bank of International Settlements, an international organization that nurtures international monetary and financial cooperation and serves as a bank for central banks, is warning the world's banks to raise interest rates at a faster pace to combat inflation and protect a vulnerable global economy, according to the Financial Times.
"The pursuit of low inflation has delivered excellent economic performance in industrialized countries over the past 20 to 30 years. However, in its annual report, the BIS ... questioned the merits of pursuing stable prices as a policy goal, saying it was insufficient to deliver stable economic performance," Reuters reports.
The BIS is warning central banks of the insurgence of stagflation - when an economy slows, but inflation rises. Stagflation is considered one of the worst, if not the worst, economic conditions to combat.
Malcolm Knight, BIS general manager, said, "It would be imprudent to count on the happy combination of strong growth and low inflation lasting indefinitely. At some point, central banks may well have to act more forcefully on policy rates than they have needed to do in the past few years."
The comments prompted investors to wonder if the Fed was going to surprise with a 50 basis point hike when it meets this week.
The BIS pointed to a combination of factors that allowed central banks to keep interest rates low and inflation contained so far. Globalization helped quell inflation because of cheap imports. However, that acted to mask domestic problems such as high deficits.
And further compounding the problem, central banks in Asia - particularly China, artificially kept the value of their currency down, which, in turn, kept prices low.
But now that raw materials prices are rising, developing countries can no longer keep prices low, which makes it difficult for advanced countries to maintain low inflation, and therefore low interest rates.
The report, says the FT, argued that "inflationary pressures might re-emerge with a vengeance and/or that the unwinding of the financial imbalances could undermine economic activity and contribute to unwelcome disinflation."
In other words, stagflation could occur if central banks don't act.
Source: Money News
http://www.equityinvestmentideas.blogspot.com/
posted by douglas mcintyre at 5:43 PM
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