The Bank for International Settlements cautioned the final stretch toward global financial stability will depend on taming inflation, and it will be painful.
In its annual economic report on Sunday, the Basel, Switzerland-based BIS noted the global economy has reached a "critical and perilous juncture" as central banks tighten monetary policy to bring inflation back under control.
BIS, the central bank for central bankers, said prices are rising far too fast while public and private debt levels are historically high. But interest rates will have to keep rising to stop the damage caused by inflation.
“Despite the most intensive monetary policy tightening in recent memory, the last leg of the journey to restore price stability will be the hardest,” it said. “Interest rates may need to stay higher for longer than the public and investors expect.”
Agustín Carstens, the general manager of BIS, which is owned by 63 central banks that account for about 95% of global GDP, said the key policy challenge today remains fully taming inflation.
"The burden is falling on many shoulders, but the risks from not acting promptly will be greater in the long term," he said. "Central banks are committed to staying the course to restore price stability and protect people's purchasing power."
Towards a new monetary system
The report includes a special chapter on the future of money. BIS says the tokenization of money and assets has great potential, but central bank money would be needed to provide a foundation of trust.
Tokenization involves the digital representation of assets on distributed ledgers, or the issuance of traditional asset classes in tokenized form.
"Today, the monetary system stands at the cusp of another major leap. Following dematerialization and digitalization, the key development is tokenization – the process of representing claims digitally on a programmable platform," it said.
BIS proposed a "blueprint for a future monetary system that harnesses the potential of tokenization" through CBDCs, tokenized deposits and other tokenized claims on financial and real assets.
It would bring these elements together in a new type of financial market infrastructure called a unified ledger. "Leveraging trust in the central bank," it said, "a shared venue of this kind has great potential to enhance the monetary and financial system."
