LONDON- The Bank for International Settlements (BIS), the global central bank umbrella body, issued a call on Sunday for further increases in interest rates, cautioning that the world economy has reached a critical juncture as nations grapple with the challenge of curbing inflation.

Despite the continuous upward trajectory of interest rates during the past 18 months, inflation continues to persistently plague numerous leading economies. Additionally, the surge in borrowing costs has resulted in severe banking failures, reminiscent of the most significant collapses witnessed during the financial crisis 15 years ago.

The Bank for International Settlements' (BIS) annual report published on Sunday, Agustin Carstens, the BIS general manager, emphasized that the global economy is currently facing a critical turning point that demands immediate attention. Carstens stated that the era of solely prioritizing short-term growth has passed, emphasizing the need for monetary policy to restore price stability and fiscal policy to consolidate.

Claudio Borio, the head of BIS's monetary and economics unit, expressed concern that an "inflationary psychology" is starting to take hold. However, he pointed out that the recent larger-than-expected interest rate hikes in Britain and Norway demonstrate that central banks are determined to tackle the issue.

The challenges faced today are unprecedented since the post-World War Two era. It is the first time that a widespread surge in inflation has coincided with significant financial vulnerabilities across many parts of the world.

According to the BIS report, the longer inflation remains high, the more extensive and prolonged the necessary policy tightening will be. The report also warned that there is now a "material" possibility of further issues emerging in the banking sector.

Claudio Borio, the head of BIS's monetary and economics unit, highlighted that if interest rates reach levels similar to those seen in the mid-1990s, the overall burden of servicing debt for major economies would be the highest in history, assuming no other changes. Borio expressed confidence that central banks would ultimately bring inflation under control, as it falls within their mandate to restore price stability. However, the concern lies in the potential costs associated with this endeavor.

During the recent annual meeting of the Bank for International Settlements (BIS), top central bankers gathered to discuss the turbulent events of the past few months. The period saw the failure of several U.S. regional banks, including Silicon Valley Bank, and the emergency rescue of Credit Suisse, which occurred in the vicinity of the BIS headquarters.

The BIS report indicated that historically, about 15% of rate hike cycles lead to severe stress in the banking system. However, this frequency increases significantly when interest rates are rising, inflation is surging, or house prices are experiencing sharp increases. If the private debt-to-GDP ratio is in the top quartile at the time of the first rate hike, the likelihood of stress in the banking system can even reach 40%.

The BIS emphasized that the current economic situation presents concerning factors such as high debt levels, a global inflation surge, and substantial increases in house prices. The report also projected that supporting aging populations will impose a cost of approximately 4% and 5% of GDP on advanced and emerging market economies, respectively, over the next two decades. Without government belt-tightening, this could push debt levels above 200% and 150% of GDP by 2050 in advanced and emerging market economies, respectively, potentially higher if economic growth rates weaken.

In addition to the economic analysis, the BIS highlighted the potential of an evolved financial system with central bank digital currencies and tokenized banking assets, which could enhance transaction speed and efficiency in global trade.

Agustin Carstens, former head of Mexico's central bank, emphasized that policymakers now bear the responsibility to address unrealistic expectations that have emerged since the Great Financial Crisis and the COVID-19 pandemic regarding the extent and duration of monetary and fiscal support.

While the BIS believes that a soft landing for the economy, where interest rates rise without triggering recessions or major banking crises, is still possible, it acknowledges the difficulties inherent in the situation. Bank of America analysts noted a significant number of interest rate hikes globally over the past two years, compared to a larger number of rate cuts since the financial crash.

Central bankers now face the challenge of reining in inflation to safe levels. Claudio Borio, referring to the task ahead, remarked that the easy gains have already been achieved, and the final stage will prove more challenging. He added, "I wouldn't be surprised if there were more surprises."