(June 5 – 11:05 ET) – After last week’s data showed a softening U.S. economy, traders rejoiced predicting the end of interest rate hikes. But not everyone is so sanguine this morning.
Urban Backström, president of the Bank for International Settlements, said today in his speech at the bank’s annual general meeting that “further increases in interest rates may be needed in the coming months to contain price pressures, particularly in those countries farthest advanced in the cycle.”
He lauded the world economy for its impressive recovery, led by the U.S. and many emerging market economies. He cited two major fears inherent in the current economy: external imbalances and asset prices. To ease imbalances the U.S. needs to slow growth and the rest of the world needs to pick up, he said. He called for labour market, pension system and fiscal reforms to boost opportunities in Europe, and liberalization and fiscal consolidation in Latin America.
Backström also warned about the strength of asset prices, noting that, “imprudent lending could fuel unwarranted asset price increases”, and high asset prices might lead to complacency about debt levels. He suggested that central banks would not conduct monetary policy to support any particular asset valuation and warned investors against getting too comfortable.
“For the recovery to continue, governments must persevere with labour market and fiscal reforms, with privatization and deregulation, and with prudent budgetary policy,” he said, “Central banks must continue to act pre-emptively to contain inflationary pressures.”
-James Langton