Central banks risk losing public confidence if they fail to reduce the high rate of inflation seen around the world, according to the boss of the body that advises them.
Agustín Carstens, the director of the Bank of International Settlements, said that central bankers must maintain a strong stance against inflation or else risk a new generation of consumers who have not yet experience a rapid rise in prices losing confidence in their independent role.
Speaking in Brazil, Carstens also warned that the recent spate of bank failures seen in the US and the reckless use of cryptocurrencies could damage confidence in the financial system.
In an unusually tough speech, the BIS boss said he was concerned that governments would undermine political institutions by spending their way to prosperity, saying the likelihood was that the rise of government budget can be self-defeating and contribute to inflation. “The consequences of the state abusing the privilege of issuing money can be disastrous,” he added.
Central banks must continue to fight inflation with high interest rates to maintain confidence in their institutions, he said. “Confidence can be lost if society doubts the central bank’s commitment to the goal of maintaining price stability. This is one of the reasons why the recent increase in inflation in almost every country is a cause for concern, he added.
He said the effects of a loss of confidence could “result in severe financial instability, with high costs for society in terms of economic growth, employment, inequality and wealth”.
Carstens, a former boss of Mexico’s central bank, did not name individuals or countries but appeared to have harsh words for any politicians who questioned the independence of their central bank and those who -primary objective of keeping inflation low and stable.
Liz Truss has been widely criticized for putting forward proposals when she was prime minister last autumn to curb the independence of the Bank of England.
Carstens’ comments are also likely to be seen as a shot across the UK central bank’s bows should it consider cutting interest rates before inflation falls for a sustained period.
The collapse of the Silicon Valley bank and the merger of Credit Suisse with UBS after the former found itself in financial trouble should be avoided, he said, to maintain confidence in the financial system, he said.
Although he warned that in many countries 50% of lending is managed by non-banks, including hedge funds and insurance companies, where regulation is weaker than the rules governing the banking system.
“The need for greater oversight and regulation of the non-bank sector has become more urgent in light of recent episodes of instability,” he added.
“The instability stems from the sector’s attachment to the traditional banking system and the tendency of various forms of non-bank intermediation to create opaque and excessive leverage as well as large liquidity mismatches. Disturbances in this sector can result in systemic financial crises. “