Central banks ‘risk losing trust if they cannot tame inflation’

theguardian.com:

Central banks risk losing public trust if they fail to bring down high rates of inflation found across the developed world, according to the boss of the body that advises them.

Agustín Carstens, the director of the Bank of International Settlements, said central bankers needed to maintain a tough stance against inflation or else risk a new generation of consumers who had never experienced rapidly rising prices losing faith in their independent role.

Speaking in Brazil, Carstens also warned that the recent run of bank failures seen in the US and the reckless use of cryptocurrencies could undermine trust in the financial system.

In an unusually hard-hitting speech, the BIS boss said he was concerned that governments would undermine political institutions by spending their way to prosperity, saying the likelihood was that an increase in government budgets would be self-defeating and contribute to inflation. “The consequences of the state abusing the privilege of issuing money can be disastrous,” he added.

Central banks should continue to fight inflation with high interest rates to maintain trust in their institutions, he said. “The trust gained can be lost if society doubts the central bank’s commitment to the objective of maintaining price stability. This is one of the reasons why the recent rise in inflation in virtually every country is a cause for concern, he added.

He said the knock-on effects of a loss of confidence can “result in severe financial instability, with very high costs for society in terms of economic growth, employment, inequality and wealth”.

Carstens, a former boss of Mexico’s central bank, did not name individuals or countries but appeared to have a harsh word for any politicians that questioned the