Banking expert warns leading economies now lurching towards inflation ‘tipping point’

The world’s top economies are at risk of reaching a bleak new “tipping point” – and it could be bad news for Aussie workers and homeowners.

An influential banking organisation has issued an alarming warning as inflation skyrockets across the globe – and it could be especially bad news for already-stretched Aussie households.

In its latest annual report, Bank for International Settlements (BIS) claimed the world’s top economies were lurching towards a “tipping point” where soaring inflation becomes the new normal, with the global economy now “flashing red” as risks grow.

BIS – an international financial organisation owned by central banks that “fosters international monetary and financial co-operation” – predicted if that were to play out, inflation would be extremely difficult to rein back in.

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Inflation is already being felt across the globe. Picture: AAP Image/Diego Fedele

The report argued that the only way to prevent that from occurring was to ignore wage claims and roll out aggressive interest rate hikes, with many nations already battling inflation, stalling economic growth and financial vulnerabilities linked to high debt and rising interest rates.

BIS – often described as a bank for the world’s central banks, including Australia’s Reserve bank – said this could all lead to “stagflation”, a phenomenon seen in the 1970s and early 80s when the inflation rate was soaring while the economic growth rate slowed down and unemployment was high.

This is all taking place as the global economy continues to take a battering from the Covid pandemic and associated supply chain disruptions, coupled with pressures caused by the war in Ukraine.

“We may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched. This would mean a major paradigm shift,” the BIS said.

Leading economies are headed towards an inflation "tipping point". Picture: iStock

“As inflation rises and becomes a focal point for agents’ behaviour, behavioural patterns tend to strengthen the transition,” the report stated, predicting companies would act to protect profit while workers would demand better wages to keep up, leading to shorter-term contracts.

“In a worst-case scenario, the global economy could be set for a period of stagflation, involving both low growth, if not an outright recession, and high inflation.”

Alarmingly, BIS admitted “some pain will be inevitable” as the planet moves against inflation, but said the problems caused by inflation “far outweigh the short-term ones of bringing it under control”.

“This puts a premium on a timely and decisive response,” it continued.

“The overriding priority is to avoid falling behind the curve, which would ultimately entail a more abrupt and vigorous adjustment.

“This would amplify the economic and social costs of bringing inflation under control.”

BIS general manager Agustin Carstens warned inflation could become “entrenched”. Picture: AFP

Those sentiments were echoed by BIS general manager Agustín Carstens himself, who said, “the key for central banks is to act quickly and decisively before inflation becomes entrenched”.

Aussies at risk

The BIS also said that nations where the majority of borrowers had floating mortgage rates were at greater threat from “strains”.

That includes Australia, where most people in recent years have taken out partial variable-rate mortgages, leaving them particularly vulnerable to rising interest rates.

“The aggregate savings built up early in the pandemic could provide buffers for households and firms to cope with higher rates, at least initially,” the BIS stated.

“However, the incidence of higher savings may not match that of debt burdens.”

It comes as Aussie homeowners brace for more interest rate pain within days, with the Reserve Bank set to announce its next interest rate decision next Tuesday.

In early May, the RBA lifted Australia’s official cash rate by 25 basis points to 0.35 per cent from 0.1 per cent – a more drastic rise than the 15 basis point hike most experts had predicted.

Then, in June, the board pulled another shock move, hiking the official cash rate by 50 basis points to 0.85 per cent and catching experts off guard with the so-called “super-sized” rate rise.

The RBA is expected to announce a second super-sized hike next week, with governor Philip Lowe telling a UBS panel discussion in Zurich late last week that an interest-rate increase of 0.75 percentage points was “not on the table” this time around.

In fact, he said the central bank was not looking to impose any 0.75 percentage rise increases, and in July would likely consider “graduated steps”, meaning an increase of 0.25 or 0.5 percentage points was on the cards.