High Global Debt Is Making Rate Hikes Trickier, BIS’s Borio Says

(Bloomberg) — The mountain of borrowings accumulated across global economies in recent years is proving a challenge to central bankers as they fight inflation, according to a Bank for International Settlements official.

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“One aspect which is complicating that task is the fact that we have very high debt levels around the world, both public and private,” Claudio Borio, head of the Basel-based organization’s monetary and economic department, told reporters.

The buildup of borrowings “suggests that the economy is more sensitive to increases in interest rates, but we don’t quite know how sensitive it is,” he added.

According to BIS data, government debt across 40 economies has risen to 90% of gross domestic product, up from 79% in the beginning of 2020.

Borio’s remarks were released on Monday in tandem with the BIS’s quarterly review, which observed that price growth has weakened internationally along with economic activity after a phase of stronger-than-expected inflation readings.

While the reaction of central banks has been “timely and forceful,” their main challenge now becomes “to find out how far to go and how long to go there,” he said.

Borio, questioned on the outlook for global interest rates, said that it’s still not clear how aggressively monetary officials will need to act to tame inflation.

“The simple answer is: One is closer than one has been in the beginning, but we don’t know exactly how far central banks will have to go,” he added.

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