BIS Warns Fed and ECB: Rethink Interest Rates to Control Inflation

The Bank for International Settlements (BIS) has called on central banks, including the Federal Reserve and European Central Bank (ECB), to rethink their interest rate strategies to prevent inflation surges like those seen post-pandemic. Outgoing BIS chief Agustin Carstens emphasized the need for "policy framework reviews" to address inflation risks more effectively.

Carstens suggested that central banks adopt scenario analysis over traditional forward guidance, ensuring they can tighten monetary policy decisively when inflation rebounds. He also urged policymakers to reconsider "make-up strategies," where inflation undershoots are offset by overshoots—a practice that contributed to record-high inflation following COVID-19 and the Russia-Ukraine war.

The recent inflation crisis fueled cost-of-living issues and political upheavals, with many governments in the U.S. and Europe facing electoral consequences. Public resentment over rising prices has also intensified scrutiny on central banks, raising concerns about their independence.

The Fed and ECB are set to complete policy reviews by mid-year, though neither plans to alter their 2% inflation targets. Carstens warned that allowing inflation to exceed targets could erode public trust in central banks and hinder their ability to manage economic stability.