State handouts and money printing are responsible for the inflation crisis, says top central banker

A waiter wearing a protective face mask says 'eat out to help'.  information in a restaurant

‘Eat Out to Help Out’ allowed guests to get 50% off meals – funded by Treasury Department – BEN STANSALL/AFP

Massive taxpayers’ money and money printing helped fuel inflation in Britain and around the world. According to a leading central banker, it would take years of interest rate problems to get the crisis under control.

Agustin Carstens, head of the Bank for International Settlements (BIS), said governments and central banks had gone too far by issuing cash during the coronavirus crisis.

Authorities now face a battle to bring inflation under control that could last until 2027, according to the institution known as the Central Bank of Central Banks.

In comments seen as critical of the policies of the Treasury and Bank of England following the outbreak of the pandemic, Mr Carstens said: “While it was understandable when the Covid crisis erupted, with hindsight it is now clear that the… “Fiscal and monetary policy support has been too large, too broad-based and too long-lived.”

In the UK, the Bank of England cut interest rates to 0.1% when the lockdown was imposed and launched two major waves of quantitative easing, printing money and pumping it into the economy through bond purchases.

That support only ended in December 2021, when policymakers were forced to raise rates to counter rising inflation, which they initially dismissed as temporary.

Mr Carsten’s comments contradict the bank’s claims, made at a select committee hearing in May, that the idea that quantitative easing has caused double-digit inflation is “not well supported”.

So far, the key interest rate has risen to 5p, but inflation is still at 8.7%, more than four times the bank’s 2% target.

In the meantime. The government borrowed in unprecedented ways outside of wartime and handed out handouts, including higher benefits and the furlough scheme, to employees paid to stay home during much of the pandemic.

Borrowing has remained high since, with a budget deficit expected of around £130 billion this financial year, while the national debt is higher than annual GDP for the first time since 1961.

Mr. Carsten pointed out that in the wake of the financial crisis, central bankers were too quick to give the impression that interest rates would remain at rock-bottom forever.

He said: “Low interest rates as far as the eye can see encouraged further public and private debt expansion.”

“In the future, politicians must be more realistic and symmetrical in their ambitions across the economic cycle. Buffers used in downturns need to be rebuilt during recovery periods. Unrealistic expectations that have arisen since the great financial crisis and the Covid-19 pandemic regarding the extent and durability of monetary and fiscal support must be corrected.”

The chief financial officer said it was crucial to tackle inflation now, before it takes hold in economies.

He warned that “a wage-price spiral could set in” as workers push for wage increases in the face of rising prices, saying: “Once an inflationary psychology sets in, it’s difficult to get rid of.”

The recent drop in inflation around the world is largely due to the fall in energy prices and the end to Covid’s supply chain chaos, but underlying inflation, particularly in the services sector, has not gone away.

This could mean officials mistaking the drop in energy prices as evidence they’ve beaten inflation and therefore failing to raise interest rates far enough.

Mr Carstens said: “Central banks may think they have done enough and then realize they need to tighten monetary policy even more.”

Unless inflation falls, interest rates may need to stay high into 2027, according to an economic scenario studied by the BIS.

Associated with this is the risk of financial crises in a global economy that has become accustomed to low interest rates.

The BIS said that last autumn’s UK pension crisis, the collapse of Credit Suisse and the US bank collapse earlier this year are all early signs that tensions are spreading in the financial system as markets adjust to higher interest rates.

The Treasury said it was determined to bring the deficit and rising prices under control.

A spokesman said: “We will have no hesitation in supporting the Bank of England in its attempt to drive inflation out of our economy.”

“We have rightly spent billions to protect families and businesses from the worst of the pandemic.

“But we won’t leave future generations with a debt they can’t pay back, so we’ve made tough decisions to balance the balance sheet and reduce debt.”

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