Debt is brake on inflation-fighting zeal

2 minute read

U.S. dollar banknote in front of stock graph is seen in this illustration taken, June 12, 2022. REUTERS/Dado Ruvic/Illustration

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LONDON, June 27 (Reuters Breakingviews) - Central banks are in a quandary. They have to raise interest rates to prevent inflation from getting out of control, but also have to consider the effects on debt. The Bank for International Settlements on Sunday called for interest rates to be raised “quickly and decisively” before expectations of higher prices become entrenched.

However, the umbrella body for the world’s central banks also fretted about the effects of higher borrowing costs, given high levels of corporate and household debt (see chart).

The Basel-based institution calculates that if rates rise as financial markets currently expect, average interest payments in a dozen developed economies will rise by 1 percentage point to 16% of income. This will hit property and equity prices and lower economic growth by 1.5%. If the U.S. Federal Reserve raises rates at the same pace as it did between 2004 and 2006, the hit to incomes and growth will double. And that’s before factoring in possible ructions in financial markets.

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

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

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Editing by George Hay and Oliver Taslic

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