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Agustín Carstens: "Income agreements are very important: an inflationary spiral must be avoided"

2022-04-06T03:57:15.293Z


The head of the Bank for International Settlements acknowledges that the risk of stagflation has increased and asks to avoid "too strong" rises in interest rates


BIS General Manager Agustín Carstens in Stockholm in a file image. Mikael Sjoberg (Bloomberg)

With runaway inflation and the world wondering what to do, Agustín Carstens (Mexico City, 63 years old) attends EL PAÍS by videoconference from his spacious and bright office in Basel (Switzerland): the head of the Bank for International Settlements (BIS, for its acronym in English, the coordinator of the issuing institutes).

He asks carefully: "Send signals that action is being taken so that inflation resumes its level", but without falling "virulent" reactions.

He acknowledges that the risk of stagflation [economic stagnation with skyrocketing prices] has increased.

And he calls on economic agents to seal income agreements —like the one being negotiated these days in Spain— to avoid a true inflationary spiral, the ogre most feared by several generations of politicians and economists.

That's where the game is played today.

Ask.

Do you still see inflation as something transitory or is it already a structural phenomenon?

Answer.

We could be on the cusp of a new era of global inflation.

There are still very important elements that are circumstantial;

transitory

But there are also others that are a little more enduring and that have to do with the formation of expectations.

The scenario has undoubtedly become more complex.

The war in Russia and Ukraine is affecting energy and, even though monetary policy is more restrictive, it will hardly affect those prices.

There are also aspects that are part of the legacy of covid-19, such as the disruption of value chains, which will gradually ease.

Now, however, we are in a position to say that these types of factors are no longer the only ones present: there are others that are affecting and that do require a more precise action of monetary policy.

P.

There is little monetary policy can do to alleviate the rise in energy prices.

R.

A strict application of monetary policy on short-term inflation would imply that other prices in the economy would have to fall.

What would it take?

greatly reduce demand.

The virulence that would be needed would be counterproductive.

What is important is precisely that energy prices do not affect inflation expectations, that they do not begin to take root in contracts and wage negotiations.

That could give an additional oomph to the inflationary process.

That people maintain their confidence that the central banks are not going to let the inflationary process adrift and that it is going to be limited.

When there are such strong shocks to some goods or services in particular, it is prudent to accept some type of deviation in the inflation targets.

Q.

What deviation can be accepted in Europe, for example?

R.

Tolerance is lower than in emerging countries, where economic actors are more used to dealing with inflation spikes.

In Europe there has been a very long period of low inflation, too low... And that means that agents are not very used to this type of phenomenon.

That would advise caution.

And you have to explain the phenomenon: communicating and educating people about inflation is very important.

Q.

In what sense?

R.

In that there are phenomena that one is not used to, and understanding them takes time.

The central banks, the authorities, must return, so to speak, to the catechism.

The insistence that the central bank has to keep the situation anchored may mean nothing to people when there is no inflation.

But, when there is inflation, people have to listen to it more: you have to be repetitive.

It is not easy to better explain the inflationary phenomenon, because at some point it involves making decisions...

Q.

Make sacrifices?

A.

Make difficult decisions.

Q.

A rate hike that is too fast could stifle growth.

R.

That possibility is there.

The art of central banking is to assess the situation and set the appropriate pace of monetary policy adjustment to minimize that impact.

It is very important, above all, to send signals that action is being taken so that inflation returns to its level.

Let it be seen that the inflationary process is not out of control.

P.

But, would you ask the central banks for caution when it comes to tightening monetary policy?

A.

Without a doubt.

Their job is not to strictly comply with the [inflation] objective: if they react too strongly, wanting to neutralize the impact of energy in the very short term, it would be necessary to induce a true recession so that the other prices fall.

And that is undesirable.

It is necessary to calibrate: without a doubt, inflationary pressures must be weighed more, because there are more risks, but a virulent or emergency action is not required.

Caution must be maintained.

More information

Profile |

Agustín Carstens: the central banker who always looked abroad

Q.

Is Europe at risk of stagflation?

R.

There is a greater risk now that this happens, not only in Europe but in other parts of the world.

Why?

Because the shocks we have faced are very severe.

Without a doubt, we are in a scenario in which inflation is going to be higher, due to the very nature of a supply shock like this.

And there will be a certain effect on growth.

Will it be enough to qualify as stagflation?

We will have to see it.

But we could say that in the last six months the possibilities of that scenario have increased.

P.

Are second-round effects already perceived or do you still see encapsulated inflation?

A.

Looking hard for him, there could be some early signs.

But not widespread: so far, nothing out of control.

Q.

How important are lease agreements right now?

A.

A lot.

Inflationary spirals must be avoided: if salary demands are disproportionate, prices will increase.

That can generate greater salary pressures and would enter into a process that is very difficult to break.

Increasing real wages or real prices under this scenario is not achieved.

Coordination between the different agents is important to prevent inflation from becoming permanent.

Q.

Have the deflationary forces of recent decades suddenly disappeared or are they still there?

R.

I think they are still there, but once the dust settles, it will be necessary to see how much they have been modified.

Yes, there is some pressure to review the issue of globalization, global value chains... There is a tendency to repatriate certain activities.

And yes, there will be companies that say: "Well, I don't want to have so much dependence on chips in Taiwan and, even if they cost me a little more, I'm going to produce them domestically."

Q.

And can that prolong inflation over time?

A.

No, I don't think it will be such a dramatic process.

Q.

Food prices have risen sharply.

R.

It is an issue that cannot be ignored.

Especially if the conflict between Russia and Ukraine continues.

I am very concerned about the price of grains and the supply of fertilizers.

It is something that we should not ignore, especially in emerging and developing countries, where the food component is greater.

Q.

Do you see the risk of entrenched inflation, especially in Europe, or not yet?

A.

I think not.

It's going to take a while, but I don't think so.

P.

How do you assess the divergence in the paths of the ECB and the Federal Reserve?

Every day is greater.

R.

The economic cycles are different, and I fully anticipate that there will be this divergence.

It is true that inflation has become a more global phenomenon, but idiosyncratic factors by region are still very important.

Q.

Aren't you worried then?

A.

No, not at all.

Q.

How do you see Latin America?

A.

In retrospect, the initial impact of the price increase has been perhaps better than expected.

The actions of the central banks have been good.

They have anticipated in their monetary policy actions, on the other hand, some aspects of increases in commodity prices may be beneficial to them.

At least financially, Latin America is better off.

The shock absorption capacity has been good.

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Source: elparis

All business articles on 2022-04-06

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