Background on the Bank for International Settlements (BIS)
The Bank for International Settlements (BIS) is an international organization based in Basel, Switzerland. Established in 1930, it serves as a forum for central banks to collaborate and strengthen the global monetary and financial system. The BIS conducts operations such as providing banking services to central banks, including Mexico’s Banco de México.
Tariffs and Their Impact on Inflation
In a recent analysis, the BIS warned about the potential inflationary risks associated with rising tariffs worldwide. According to Andréa Maechler, the deputy managing director of BIS, attempting to limit inflation through a more restrictive monetary policy carries the risk of exacerbating its impact on economic growth.
Historical Context and Current Inflation
Traditionally, central banks have been advised to disregard supply shocks. However, Maechler suggests that this approach may not be applicable given the ongoing inflationary pressures during the post-pandemic recovery, which remains fresh in people’s minds.
Interconnected Global Economy
The BIS analysis emphasizes that the global economy is now far more interconnected than in the past when tariffs were a prominent feature of trade. Today, complex and extensive supply chains span the globe, while significant financial capital flows also interconnect nations.
Challenging Monetary Policy Decisions
The BIS analysis anticipates that global tariff increases will substantially affect global growth and create difficult monetary policy decisions for central banks. These tariffs emerged amidst a prolonged period of uncertainty regarding trade policies.
Tariff Effects on Supply and Demand
Theoretically, tariff increases act as negative supply shocks for the countries imposing them and negative demand shocks for those affected. However, Maechler points out that the intricate global supply chains and companies’ ability to reroute trade flows complicate this scenario.
Additional Inflationary Impacts
Interruptions in supply chains and deviations in trade flows could have further effects on production and inflation, beyond the direct consequences of tariffs.
BIS Recommendations
To address these challenges, the BIS proposes that policymakers should “guide themselves by the need to maintain well-anchored inflation expectations.” They recommend that central bank officials consider financial linkages and their transmission to financial conditions carefully when assessing monetary and financial stability prospects.
Key Questions and Answers
- What are the main concerns raised by the BIS regarding tariffs and inflation? The BIS warns that rising tariffs could exacerbate their negative impact on economic growth while posing challenges for central banks in managing inflation.
- Why is the traditional advice for central banks to ignore supply shocks potentially inapplicable now? The ongoing inflationary pressures during the post-pandemic recovery make it difficult to disregard supply shocks as central banks aim to maintain well-anchored inflation expectations.
- How has the global economy changed since tariffs were more common in international trade? The global economy is now far more interconnected, with complex supply chains spanning the globe and significant financial capital flows linking nations.
- What additional inflationary impacts could result from tariffs beyond their direct consequences? Interruptions in supply chains and deviations in trade flows could have further effects on production and inflation.
- What recommendations does the BIS provide to address these challenges? The BIS advises policymakers to maintain well-anchored inflation expectations and consider financial linkages and their transmission to financial conditions carefully when assessing stability prospects.
