Countries must cut spending or raise taxes, says BC dos BCs – 06/25/2023 – Market

Governments around the world must raise taxes or cut spending to help central banks control inflation and reduce the risk of a financial crisis, the Bank for International Settlements (BIS) said.

The central bank of central banks, which often acts as an informal mouthpiece for institutions, said governments were “testing the limits of what might be called a region of stability” by letting fiscal policy slack while inflation remains high. and interest rates skyrocket.

“The consolidation [fiscal] would provide critical support in the fight against inflation,” said the BIS in its annual report, published this Sunday (25).

“It would also reduce the need for monetary policy to keep interest rates higher for longer, thus lowering the risk of financial instability.”

Traditionally, there has been a separation between fiscal policy, defined by governments, and monetary policy, defined by central banks and aimed at controlling inflation, taking into account the levels of public spending and taxation.

Central bankers insist they are confident in their ability to decouple monetary policy decisions from financial stability concerns, but the BIS’ concern contrasts with those reassurances.

The likelihood of a financial crisis is significant because interest rates are high and continuing to rise, the BIS said. However, he added, these risks can be reduced if governments tighten fiscal policy, taking some pressure off interest rates as the main policy tool and strengthening countries’ public finances.

High interest rates already caused serious financial turmoil last year, the BIS said, citing the crisis in UK government bonds and pension funds last October and the failure of US regional banks and Credit Suisse this year. spring.

Agustín Carstens, head of the BIS, said that inflation was falling in most countries, but “the last mile is usually the most difficult”.

“The burden is on many shoulders, but the risks of not acting promptly will be greater in the longer term. Central banks are committed to staying the course to restore price stability and protect people’s purchasing power,” he said.

The BIS said that, in the long term, governments and central banks should not try to solve all of society’s problems with economic stimulus. This endorsed the recent OECD advice.

Central bankers kept rates very low for too long when inflation was below target, because this encouraged the private sector to accumulate debt, increasing eventual financial sector vulnerabilities, the BIS said.

“Once price stability is restored, monetary policy could be more tolerant of moderate, if persistent, inflation shortfalls from target targets,” the report said.

The document added that, instead of trying to boost growth and compensate for crises with increases in public spending, governments should recognize that weaker public finances limit their ability to react in a crisis.

“Policymakers need to have a more acute recognition of the limitations of macroeconomic stabilization policies,” the report said.

“Monetary and fiscal policy can be a great force for good, but if overly ambitious it can also do great harm.”

Monica Defend, director of the Amundi Institute, said: “We need a lot more coordination between fiscal and monetary policy, and we’re not there yet. at the same time being very focused and directed”.

That pressure will increase as the transition to greener energy alternatives moves forward in the coming years, Defend warned.

“The key question is: who is going to fund this? How can we seriously go down this path without coordination between [as políticas] fiscal and monetary?

James Knightley, chief international economist at ING Bank, said: “You can’t really have macro stability without financial stability, and if you focus too much on one over the other, that’s when risks materialize.”

_{Translated by Luiz Roberto M. Gonçalves}