Hard or soft landing?
BIS Bulletin
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No
59
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14 July 2022
Key takeaways
- Inflation is now at its highest level in several decades and threatens to become entrenched. Whether inflation is demand- or supply-driven, central banks have little choice but to tighten policy to lower aggregate demand and bring inflation back to target.
- Evidence from past tightening cycles suggests that strong growth and high job vacancies, as well as front-loaded rate hikes, can help prevent a hard landing. But rapidly increasing inflation, low term spreads and elevated debt levels raise the risk of a recession, particularly in the face of persistent negative supply shocks.
- Central banks need to steer a narrow course between tightening too much or too quickly, which could precipitate a hard landing, and tightening too little or too late, which could lead to inflationary pressures becoming ingrained, necessitating more costly measures down the road.