Central Banks Face Trust Crisis as Inflation Persists

The Bank of International Settlements (BIS) has issued a stark warning that central banks risk losing public trust if they fail to address the high levels of inflation prevailing in developed countries.

Agustín Carstens, the director of BIS, emphasized the necessity for central bankers to adopt a firm stance against inflation to avoid eroding the confidence of a generation of consumers who have not previously experienced rapid price increases. Speaking in Brazil, Carstens further cautioned against the detrimental impact of bank failures in the United States and the reckless usage of cryptocurrencies, both of which could undermine trust in the financial system.

Carstens delivered a strongly worded speech, expressing concerns that governments relying on excessive spending to achieve economic prosperity would compromise political institutions. He emphasized that increased government budgets were likely to be counterproductive and contribute to inflation, underscoring the disastrous consequences of misusing the privilege of issuing money.

He stressed the importance of central banks continuing to combat inflation through the implementation of higher interest rates in order to maintain trust in their institutions. The recent surge in inflation across numerous countries was cited as a significant cause for concern due to the potential ramifications such as financial instability, diminished economic growth, unemployment, inequality, and wealth disparities.

Although Carstens did not explicitly mention any specific individuals or countries, his remarks were interpreted as a rebuke to politicians who question the independence of their central banks and their fundamental role in maintaining low and stable inflation. The former Mexican central bank chief’s comments also serve as a warning to the Bank of England against considering interest rate cuts before observing a sustained period of inflation reduction.

Carstens stressed that preventing the collapse of financial institutions, such as Silicon Valley Bank, and avoiding mergers driven by financial troubles, as seen with Credit Suisse and UBS, were imperative to preserve trust in the financial system. Additionally, he emphasized the need for enhanced supervision and regulation of the non-bank sector, including hedge funds and insurance companies, due to their interconnectedness with traditional banks and the potential for generating instability and systemic financial crises.