World may be on brink of new inflationary era, says central bank chief

The world economy may be on the brink of a new inflationary era with persistently higher growth in consumer prices due to the retreat of globalisation, a leading central bank chief has said.

In a speech setting out risks for persistently higher rates of inflation, Carstens said higher borrowing costs could be required for several years to curb the risk of spiralling prices wreaking long-term damage on the economies of the industrialised world.

The Bank of England is on course to raise its base rate to 2% next year according to City investors, up from the current level of 0.75% after Threadneedle Street began hiking rates from a record low of 0.1% in December last year.

Last month the US Federal Reserve approved a 0.25 percentage point hike from near zero, the first increase since December 2018, with a signal it plans several more rate rises this year.

Carstens said a trend for manufacturers to cut back extensive global supply chains in response to the pre-pandemic trade war between the US and China and, more recently, sanctions on Russia, meant production costs would be higher for a longer period than central banks and independent economists currently estimate.

Unlike Carstens, who said there was a risk of high inflation becoming entrenched in the public consciousness, Cunliffe said there were few signs of this so far.