The Bank for International Settlements (BIS) is optimistic that central banks will be able to help achieve a soft landing for the global economy. This means a reduction in inflation to target levels without triggering a recession. However, in its Annual Economic Report published on 30 June, the BIS also warns of the existing upside risks to inflation. „Now is not the time to let our guard down“, BIS General Manager Agustín Carstens cautioned in a guest commentary for Börsen-Zeitung.

The BIS sees the biggest risks to the reduction of inflation rates to central bank targets in the price development of services, and the expansive fiscal policies of many states. „Unchecked public finances would make it difficult to bring inflation down and would endanger macroeconomic and financial stability in the long term“, the report states. Therefore, the institution, also known as the central bank of central banks, advises central banks not to consider the fight against high inflation as won, and also makes an appeal to governments.

Policies must create a solid macroeconomic and financial foundation for the future, the report says. Hence, fiscal constraints are essential. Otherwise, the interest costs of high debt will narrow the scope for urgently needed investments and structural reforms. Governments need to contribute to increasing productivity, and thus economic growth, through investments in the green transformation of the economy, education, and artificial intelligence (AI). Additionally, policies should provide incentives for the private sector to invest more in these areas.

Low productivity is not only bad for economic growth but also hinders the disinflation process. The BIS also identifies geopolitical tensions as an upside risk to inflation. „Geopolitical tensions pose a constant risk to food and energy prices as well as financial markets“, noted Carstens.

The BIS also reiterated its call for governments not to stimulate demand with their fiscal policies. This would rekindle inflation and counteract the efforts of central banks in striving for price stability.

Moreover, the BIS points to another reason why fiscal consolidation is urgently needed in many states – financial stability. Currently, financial markets trust the solvency of states. However, if this changes, it would happen very quickly. This is the nature of financial crises, said BIS Chief Economist Claudio Borio. Therefore, governments should take action now, and not wait until there are doubts about their solvency among investors.

Risks to financial stability could also stem from the troubled commercial real estate sector. Thus, in its report the BIS takes a separate look at this sector. In Germany, 12% of all bank loans go to real estate, and the figure for the US is 18%. A wave of bankruptcies among commercial real estate owners could therefore hit banks hard. Especially since in the US, lending to this sector has seen above average increases.

Currently, according to the BIS, the rise in defaults on commercial real estate loans is not leading to financial turbulence. But the institution is concerned that the reserves of banks in the US are not rising in line with the increase in defaults. Thus, vigilance is required from banks and regulatory authorities.