Tariff-fuelled greenback good points pose international stagflation dangers, BIS warns

By Marc Jones

LONDON (Reuters) – Employees at central financial institution umbrella group, the Financial institution for Worldwide Settlements, have warned of a worldwide bout of stagflation if commerce tariffs promised by soon-to-be-U.S. President Donald Trump proceed to drive up the greenback.

Stagflation – the mix of sturdy inflation and weak financial development is seen as Kryptonite by economists as shoppers and companies are hit from either side.

Simply days earlier than Trump takes workplace, the BIS-published report mentioned the world economic system was on monitor for a “smooth touchdown” but it surely pressured rising uncertainty attributable to what it described as the brand new looming challenges.

It highlighted surveys displaying an increase within the perceived likelihood of “no touchdown” – sturdy U.S. financial development and sticky inflation, which may restrict the diploma to which the U.S. and different international locations can minimize rates of interest.

On the identical time, international commerce is prone to face elevated “frictions and fragmentation” with the broad-based commerce conflict between Washington and different international locations now “a tangible danger situation,” it warned.

If the U.S. finally ends up barely reducing, and even elevating its rates of interest consequently, however different nations need to slash theirs, it may trigger important capital circulate and change charge changes.

“The worth of the U.S. greenback may proceed its latest rise on the again of upper U.S. rates of interest, a stronger U.S. economic system and excessive political uncertainty,” the BIS report mentioned.

“This might have stagflationary results on the worldwide economic system because of the greenback’s dominant position in commerce invoicing and worldwide finance.”

A stronger greenback tends to spice up inflation exterior the U.S. by growing import costs and inflation expectations, particularly in growing world international locations.

Greenback energy additionally tends to tighten monetary situations by pushing up international borrowing prices. That then dampens actual financial exercise, significantly in international locations with weak fundamentals and susceptible fiscal positions, the BIS mentioned.