• Structural reforms must be revived to support higher sustainable growth and improve income distribution.
• Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
• Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
• Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
• Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.

Conclusion
A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.

Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.

Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.

The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.

Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.

Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.

. Structural Policies: Enhancing Productivity and Economic Competitiveness 

• Structural reforms must be revived to support higher sustainable growth and improve income distribution.
• Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
• Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
• Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
• Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.

Conclusion
A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
• Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
• Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
• The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
• Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
• Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.

. Structural Policies: Enhancing Productivity and Economic Competitiveness 

• Structural reforms must be revived to support higher sustainable growth and improve income distribution.
• Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
• Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
• Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
• Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.

Conclusion
A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.

Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.

Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.

Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.

Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.

Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.

Prudential Policies: Strengthening Financial System Resilience 

• Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
• Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
• Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
• The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
• Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
• Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.

. Structural Policies: Enhancing Productivity and Economic Competitiveness 

• Structural reforms must be revived to support higher sustainable growth and improve income distribution.
• Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
• Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
• Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
• Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.

Conclusion
A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
• Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
• Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
• Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
• Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
• Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.

Prudential Policies: Strengthening Financial System Resilience 

• Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
• Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
• Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
• The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
• Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
• Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.

. Structural Policies: Enhancing Productivity and Economic Competitiveness 

• Structural reforms must be revived to support higher sustainable growth and improve income distribution.
• Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
• Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
• Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
• Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.

Conclusion
A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.

Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.

Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.

Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.

Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.

Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.

For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.

Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 

• Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
• Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
• Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
• Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
• Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
• Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.

Prudential Policies: Strengthening Financial System Resilience 

• Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
• Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
• Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
• The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
• Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
• Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.

. Structural Policies: Enhancing Productivity and Economic Competitiveness 

• Structural reforms must be revived to support higher sustainable growth and improve income distribution.
• Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
• Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
• Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
• Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.

Conclusion
A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
• Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
• Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
• Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
• Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
• Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
• For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.

Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 

• Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
• Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
• Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
• Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
• Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
• Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.

Prudential Policies: Strengthening Financial System Resilience 

• Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
• Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
• Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
• The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
• Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
• Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.

. Structural Policies: Enhancing Productivity and Economic Competitiveness 

• Structural reforms must be revived to support higher sustainable growth and improve income distribution.
• Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
• Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
• Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
• Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.

Conclusion
A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.

Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).

Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.

Japan was an exception, where bank lending remained strong due to continued monetary easing policies.

Conclusion
The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
• Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
• Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
• Japan was an exception, where bank lending remained strong due to continued monetary easing policies.

Conclusion
The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.

Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.

Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.

The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.

Bank Lending: Tightened Standards and Weaker Loan Demand   

• Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
• Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
• Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
• Japan was an exception, where bank lending remained strong due to continued monetary easing policies.

Conclusion
The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
• Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
• Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
• The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.

Bank Lending: Tightened Standards and Weaker Loan Demand   

• Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
• Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
• Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
• Japan was an exception, where bank lending remained strong due to continued monetary easing policies.

Conclusion
The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.

However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.

Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.

Bond and Equity Volatilities: Bond Market Volatility Remained High   

• Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
• Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
• Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
• The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.

Bank Lending: Tightened Standards and Weaker Loan Demand   

• Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
• Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
• Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
• Japan was an exception, where bank lending remained strong due to continued monetary easing policies.

Conclusion
The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
• However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
• Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.

Bond and Equity Volatilities: Bond Market Volatility Remained High   

• Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
• Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
• Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
• The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.

Bank Lending: Tightened Standards and Weaker Loan Demand   

• Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
• Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
• Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
• Japan was an exception, where bank lending remained strong due to continued monetary easing policies.

Conclusion
The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.

However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).

Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.

China was an exception, as equities slumped at the start of 2024 before showing partial recovery.

Credit Spreads: Narrowed Despite Rate Hikes   

• Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
• However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
• Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.

Bond and Equity Volatilities: Bond Market Volatility Remained High   

• Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
• Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
• Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
• The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.

Bank Lending: Tightened Standards and Weaker Loan Demand   

• Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
• Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
• Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
• Japan was an exception, where bank lending remained strong due to continued monetary easing policies.

Conclusion
The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
• However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
• Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
• China was an exception, as equities slumped at the start of 2024 before showing partial recovery.

Credit Spreads: Narrowed Despite Rate Hikes   

• Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
• However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
• Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.

Bond and Equity Volatilities: Bond Market Volatility Remained High   

• Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
• Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
• Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
• The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.

Bank Lending: Tightened Standards and Weaker Loan Demand   

• Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
• Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
• Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
• Japan was an exception, where bank lending remained strong due to continued monetary easing policies.

Conclusion
The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.

Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.

Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
• Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
• Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.

Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.

Structural Reforms for Long-Term Inflation Control  

• Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
• Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
• Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
• Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.

Structural Reforms for Long-Term Inflation Control  

• Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
• Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
• Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Central banks implemented prudential measures to enhance financial stability amid tightening cycles.

Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.

EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.

Exchange Rate Management and Foreign Exchange Interventions  

• Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
• Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.

Structural Reforms for Long-Term Inflation Control  

• Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
• Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
• Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
• Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
• EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.

Exchange Rate Management and Foreign Exchange Interventions  

• Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
• Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.

Structural Reforms for Long-Term Inflation Control  

• Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
• Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
• Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Governments adjusted fiscal policies to complement monetary tightening efforts.

In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.

Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.

However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.

Prudential and Macro-Financial Policies to Strengthen Financial Resilience  

• Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
• Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
• EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.

Exchange Rate Management and Foreign Exchange Interventions  

• Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
• Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.

Structural Reforms for Long-Term Inflation Control  

• Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
• Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
• Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Governments adjusted fiscal policies to complement monetary tightening efforts.
• In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
• Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
• However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.

Prudential and Macro-Financial Policies to Strengthen Financial Resilience  

• Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
• Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
• EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.

Exchange Rate Management and Foreign Exchange Interventions  

• Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
• Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.

Structural Reforms for Long-Term Inflation Control  

• Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
• Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
• Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Clear communication and transparency in policy decisions were key to anchoring inflation expectations.

The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.

The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.

EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.

Fiscal Consolidation and Coordination with Governments  

• Governments adjusted fiscal policies to complement monetary tightening efforts.
• In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
• Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
• However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.

Prudential and Macro-Financial Policies to Strengthen Financial Resilience  

• Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
• Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
• EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.

Exchange Rate Management and Foreign Exchange Interventions  

• Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
• Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.

Structural Reforms for Long-Term Inflation Control  

• Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
• Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
• Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
• The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
• The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
• EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.

Fiscal Consolidation and Coordination with Governments  

• Governments adjusted fiscal policies to complement monetary tightening efforts.
• In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
• Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
• However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.

Prudential and Macro-Financial Policies to Strengthen Financial Resilience  

• Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
• Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
• EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.

Exchange Rate Management and Foreign Exchange Interventions  

• Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
• Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.

Structural Reforms for Long-Term Inflation Control  

• Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
• Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
• Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Central banks implemented the most synchronized and intense monetary policy tightening in decades.

The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.

Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.

Managing Inflation Expectations through Forward Guidance   

• Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
• The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
• The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
• EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.

Fiscal Consolidation and Coordination with Governments  

• Governments adjusted fiscal policies to complement monetary tightening efforts.
• In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
• Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
• However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.

Prudential and Macro-Financial Policies to Strengthen Financial Resilience  

• Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
• Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
• EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.

Exchange Rate Management and Foreign Exchange Interventions  

• Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
• Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.

Structural Reforms for Long-Term Inflation Control  

• Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
• Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
• Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Central banks implemented the most synchronized and intense monetary policy tightening in decades.
• The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
• Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.

Managing Inflation Expectations through Forward Guidance   

• Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
• The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
• The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
• EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.

Fiscal Consolidation and Coordination with Governments  

• Governments adjusted fiscal policies to complement monetary tightening efforts.
• In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
• Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
• However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.

Prudential and Macro-Financial Policies to Strengthen Financial Resilience  

• Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
• Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
• EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.

Exchange Rate Management and Foreign Exchange Interventions  

• Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
• Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.

Structural Reforms for Long-Term Inflation Control  

• Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
• Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
• Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.

Conclusion
Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.

Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.

Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
Conclusion
The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Falling producer and export prices in China played a significant role in reducing global inflation.

China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.

This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Falling producer and export prices in China played a significant role in reducing global inflation.
• China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
• This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.

Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.

This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.

China’s Disinflationary Impact 

• Falling producer and export prices in China played a significant role in reducing global inflation.
• China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
• This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
• Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
• This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.

China’s Disinflationary Impact 

• Falling producer and export prices in China played a significant role in reducing global inflation.
• China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
• This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.

Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.

This natural adjustment in consumption patterns contributed to the broader disinflationary trend.

Anchored Inflation Expectations 

• Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
• Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
• This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.

China’s Disinflationary Impact 

• Falling producer and export prices in China played a significant role in reducing global inflation.
• China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
• This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
• Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
• This natural adjustment in consumption patterns contributed to the broader disinflationary trend.

Anchored Inflation Expectations 

• Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
• Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
• This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.

China’s Disinflationary Impact 

• Falling producer and export prices in China played a significant role in reducing global inflation.
• China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
• This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.

Energy prices fell, reducing headline inflation, particularly in advanced economies.

The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Demand Shifts and Spending Rotation  

• The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
• Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
• This natural adjustment in consumption patterns contributed to the broader disinflationary trend.

Anchored Inflation Expectations 

• Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
• Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
• This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.

China’s Disinflationary Impact 

• Falling producer and export prices in China played a significant role in reducing global inflation.
• China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
• This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
• Energy prices fell, reducing headline inflation, particularly in advanced economies.
• The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Demand Shifts and Spending Rotation  

• The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
• Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
• This natural adjustment in consumption patterns contributed to the broader disinflationary trend.

Anchored Inflation Expectations 

• Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
• Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
• This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.

China’s Disinflationary Impact 

• Falling producer and export prices in China played a significant role in reducing global inflation.
• China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
• This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.

Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.

The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.

Declining Commodity and Energy Prices

• Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
• Energy prices fell, reducing headline inflation, particularly in advanced economies.
• The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Demand Shifts and Spending Rotation  

• The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
• Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
• This natural adjustment in consumption patterns contributed to the broader disinflationary trend.

Anchored Inflation Expectations 

• Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
• Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
• This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.

China’s Disinflationary Impact 

• Falling producer and export prices in China played a significant role in reducing global inflation.
• China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
• This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
• Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
• The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.

Declining Commodity and Energy Prices

• Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
• Energy prices fell, reducing headline inflation, particularly in advanced economies.
• The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Demand Shifts and Spending Rotation  

• The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
• Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
• This natural adjustment in consumption patterns contributed to the broader disinflationary trend.

Anchored Inflation Expectations 

• Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
• Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
• This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.

China’s Disinflationary Impact 

• Falling producer and export prices in China played a significant role in reducing global inflation.
• China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
• This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.

The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.

Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually

Easing of Supply Chain Disruptions

• The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
• Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
• The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.

Declining Commodity and Energy Prices

• Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
• Energy prices fell, reducing headline inflation, particularly in advanced economies.
• The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Demand Shifts and Spending Rotation  

• The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
• Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
• This natural adjustment in consumption patterns contributed to the broader disinflationary trend.

Anchored Inflation Expectations 

• Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
• Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
• This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.

China’s Disinflationary Impact 

• Falling producer and export prices in China played a significant role in reducing global inflation.
• China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
• This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
• The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
• Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually

Easing of Supply Chain Disruptions

• The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
• Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
• The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.

Declining Commodity and Energy Prices

• Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
• Energy prices fell, reducing headline inflation, particularly in advanced economies.
• The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Demand Shifts and Spending Rotation  

• The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
• Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
• This natural adjustment in consumption patterns contributed to the broader disinflationary trend.

Anchored Inflation Expectations 

• Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
• Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
• This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.

China’s Disinflationary Impact 

• Falling producer and export prices in China played a significant role in reducing global inflation.
• China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
• This contributed to a global disinflationary impulse, particularly in goods markets.

Moderation in Wage Growth and Labor Market Adjustments 

• While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
• Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
• Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
  Conclusion
  The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.

Falling commodity prices and a shift in global demand patterns contributed to disinflation.

The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.

Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
• Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Unlike past monetary tightening cycles, EMEs managed to withstand the impact of higher global interest rates.

Improved monetary policy frameworks, stronger reserves, better financial regulation, and reduced currency mismatches helped EMEs maintain financial stability.

While some EMEs faced economic challenges, sovereign credit ratings remained stable, and capital outflows were controlled.

Fiscal Policies Provided Additional Cushion

• Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
• Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Unlike past monetary tightening cycles, EMEs managed to withstand the impact of higher global interest rates.
• Improved monetary policy frameworks, stronger reserves, better financial regulation, and reduced currency mismatches helped EMEs maintain financial stability.
• While some EMEs faced economic challenges, sovereign credit ratings remained stable, and capital outflows were controlled.

Fiscal Policies Provided Additional Cushion

• Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
• Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

The global financial system remained resilient, avoiding widespread banking crises or financial meltdowns.

Unlike past tightening cycles, there were no significant systemic failures in the banking sector.

The Federal Reserve and other central banks provided clear policy guidance, reducing market panic and stabilizing investor expectations.

Emerging Market Economies (EMEs) were more Resilient

• Unlike past monetary tightening cycles, EMEs managed to withstand the impact of higher global interest rates.
• Improved monetary policy frameworks, stronger reserves, better financial regulation, and reduced currency mismatches helped EMEs maintain financial stability.
• While some EMEs faced economic challenges, sovereign credit ratings remained stable, and capital outflows were controlled.

Fiscal Policies Provided Additional Cushion

• Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
• Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• The global financial system remained resilient, avoiding widespread banking crises or financial meltdowns.
• Unlike past tightening cycles, there were no significant systemic failures in the banking sector.
• The Federal Reserve and other central banks provided clear policy guidance, reducing market panic and stabilizing investor expectations.

Emerging Market Economies (EMEs) were more Resilient

• Unlike past monetary tightening cycles, EMEs managed to withstand the impact of higher global interest rates.
• Improved monetary policy frameworks, stronger reserves, better financial regulation, and reduced currency mismatches helped EMEs maintain financial stability.
• While some EMEs faced economic challenges, sovereign credit ratings remained stable, and capital outflows were controlled.

Fiscal Policies Provided Additional Cushion

• Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
• Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.

Energy prices fell, reducing headline inflation, particularly in advanced economies.

The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Financial System Stability and Absence of Major Crises

• The global financial system remained resilient, avoiding widespread banking crises or financial meltdowns.
• Unlike past tightening cycles, there were no significant systemic failures in the banking sector.
• The Federal Reserve and other central banks provided clear policy guidance, reducing market panic and stabilizing investor expectations.

Emerging Market Economies (EMEs) were more Resilient

• Unlike past monetary tightening cycles, EMEs managed to withstand the impact of higher global interest rates.
• Improved monetary policy frameworks, stronger reserves, better financial regulation, and reduced currency mismatches helped EMEs maintain financial stability.
• While some EMEs faced economic challenges, sovereign credit ratings remained stable, and capital outflows were controlled.

Fiscal Policies Provided Additional Cushion

• Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
• Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
• Energy prices fell, reducing headline inflation, particularly in advanced economies.
• The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Financial System Stability and Absence of Major Crises

• The global financial system remained resilient, avoiding widespread banking crises or financial meltdowns.
• Unlike past tightening cycles, there were no significant systemic failures in the banking sector.
• The Federal Reserve and other central banks provided clear policy guidance, reducing market panic and stabilizing investor expectations.

Emerging Market Economies (EMEs) were more Resilient

• Unlike past monetary tightening cycles, EMEs managed to withstand the impact of higher global interest rates.
• Improved monetary policy frameworks, stronger reserves, better financial regulation, and reduced currency mismatches helped EMEs maintain financial stability.
• While some EMEs faced economic challenges, sovereign credit ratings remained stable, and capital outflows were controlled.

Fiscal Policies Provided Additional Cushion

• Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
• Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

The labor market remained unusually strong, with unemployment rates staying close to pre-pandemic levels.

Despite aggressive monetary policy tightening, employment levels did not decline sharply, contrary to past tightening cycles

Higher wages, pandemic-era savings, and government support programs contributed to maintaining consumer demand, helping to offset recessionary pressures.

Labour market tightness supported household income and spending, preventing a severe contraction in demand.

Smooth and Controlled Monetary Policy Transmission  

• Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
• Energy prices fell, reducing headline inflation, particularly in advanced economies.
• The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Financial System Stability and Absence of Major Crises

• The global financial system remained resilient, avoiding widespread banking crises or financial meltdowns.
• Unlike past tightening cycles, there were no significant systemic failures in the banking sector.
• The Federal Reserve and other central banks provided clear policy guidance, reducing market panic and stabilizing investor expectations.

Emerging Market Economies (EMEs) were more Resilient

• Unlike past monetary tightening cycles, EMEs managed to withstand the impact of higher global interest rates.
• Improved monetary policy frameworks, stronger reserves, better financial regulation, and reduced currency mismatches helped EMEs maintain financial stability.
• While some EMEs faced economic challenges, sovereign credit ratings remained stable, and capital outflows were controlled.

Fiscal Policies Provided Additional Cushion

• Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
• Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• The labor market remained unusually strong, with unemployment rates staying close to pre-pandemic levels.
• Despite aggressive monetary policy tightening, employment levels did not decline sharply, contrary to past tightening cycles
• Higher wages, pandemic-era savings, and government support programs contributed to maintaining consumer demand, helping to offset recessionary pressures.
• Labour market tightness supported household income and spending, preventing a severe contraction in demand.

Smooth and Controlled Monetary Policy Transmission  

• Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
• Energy prices fell, reducing headline inflation, particularly in advanced economies.
• The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Financial System Stability and Absence of Major Crises

• The global financial system remained resilient, avoiding widespread banking crises or financial meltdowns.
• Unlike past tightening cycles, there were no significant systemic failures in the banking sector.
• The Federal Reserve and other central banks provided clear policy guidance, reducing market panic and stabilizing investor expectations.

Emerging Market Economies (EMEs) were more Resilient

• Unlike past monetary tightening cycles, EMEs managed to withstand the impact of higher global interest rates.
• Improved monetary policy frameworks, stronger reserves, better financial regulation, and reduced currency mismatches helped EMEs maintain financial stability.
• While some EMEs faced economic challenges, sovereign credit ratings remained stable, and capital outflows were controlled.

Fiscal Policies Provided Additional Cushion

• Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
• Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Despite inflation surging, global economic growth remained relatively strong in 2023, with global GDP growth recorded at 3.2%, only slightly below 2022’s 3.5%.

Growth exceeded expectations in several advanced economies (AEs) such as the United States and Japan, as well as in major emerging market economies (EMEs) like India, Mexico, and Brazil.

The feared global recession did not materialize, and growth projections for 2024 remained stable at around 3.0%.

Strong Labor Markets and Household Spending Support 

• The labor market remained unusually strong, with unemployment rates staying close to pre-pandemic levels.
• Despite aggressive monetary policy tightening, employment levels did not decline sharply, contrary to past tightening cycles
• Higher wages, pandemic-era savings, and government support programs contributed to maintaining consumer demand, helping to offset recessionary pressures.
• Labour market tightness supported household income and spending, preventing a severe contraction in demand.

Smooth and Controlled Monetary Policy Transmission  

• Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
• Energy prices fell, reducing headline inflation, particularly in advanced economies.
• The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Financial System Stability and Absence of Major Crises

• The global financial system remained resilient, avoiding widespread banking crises or financial meltdowns.
• Unlike past tightening cycles, there were no significant systemic failures in the banking sector.
• The Federal Reserve and other central banks provided clear policy guidance, reducing market panic and stabilizing investor expectations.

Emerging Market Economies (EMEs) were more Resilient

• Unlike past monetary tightening cycles, EMEs managed to withstand the impact of higher global interest rates.
• Improved monetary policy frameworks, stronger reserves, better financial regulation, and reduced currency mismatches helped EMEs maintain financial stability.
• While some EMEs faced economic challenges, sovereign credit ratings remained stable, and capital outflows were controlled.

Fiscal Policies Provided Additional Cushion

• Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
• Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

• Despite inflation surging, global economic growth remained relatively strong in 2023, with global GDP growth recorded at 3.2%, only slightly below 2022’s 3.5%.
• Growth exceeded expectations in several advanced economies (AEs) such as the United States and Japan, as well as in major emerging market economies (EMEs) like India, Mexico, and Brazil.
• The feared global recession did not materialize, and growth projections for 2024 remained stable at around 3.0%.

Strong Labor Markets and Household Spending Support 

• The labor market remained unusually strong, with unemployment rates staying close to pre-pandemic levels.
• Despite aggressive monetary policy tightening, employment levels did not decline sharply, contrary to past tightening cycles
• Higher wages, pandemic-era savings, and government support programs contributed to maintaining consumer demand, helping to offset recessionary pressures.
• Labour market tightness supported household income and spending, preventing a severe contraction in demand.

Smooth and Controlled Monetary Policy Transmission  

• Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
• Energy prices fell, reducing headline inflation, particularly in advanced economies.
• The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.

Financial System Stability and Absence of Major Crises

• The global financial system remained resilient, avoiding widespread banking crises or financial meltdowns.
• Unlike past tightening cycles, there were no significant systemic failures in the banking sector.
• The Federal Reserve and other central banks provided clear policy guidance, reducing market panic and stabilizing investor expectations.

Emerging Market Economies (EMEs) were more Resilient

• Unlike past monetary tightening cycles, EMEs managed to withstand the impact of higher global interest rates.
• Improved monetary policy frameworks, stronger reserves, better financial regulation, and reduced currency mismatches helped EMEs maintain financial stability.
• While some EMEs faced economic challenges, sovereign credit ratings remained stable, and capital outflows were controlled.

Fiscal Policies Provided Additional Cushion

• Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
• Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.

Inflationary Pressures Began to Ease 

• Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
• Falling commodity prices and a shift in global demand patterns contributed to disinflation.
• The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 

Conclusion
Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.

Learning Objectives

• Explain why the sudden increase in inflation that reached a peak in 2022 following the Covid-19 pandemic did not result in a full-scale global recession.
• Identify and describe key factors that played a role in the process of disinflation around the world over the past year.
• Describe policy measures introduced and implemented by different central banks aimed at driving their economies toward meeting inflation targets.
• Discuss how monetary policy changes enacted by central banks to reduce inflation impacted equity prices, credit spreads, bond and equity volatilities, and bank lending.
• Describe monetary, fiscal, prudential, and structural policies that need to be adopted to promote (long-term) sustainable economic growth and low inflation.

Resilient Growth Post-Pandamic Inflation: Why A Global Recession was Averted

The sudden increase in inflation following the Covid-19 pandemic, which peaked in 2022, did not result in a full-scale global recession due to several key factors outlined in the BIS Annual Economic Report 2024:

1. Resilient Global Growth and Stronger-than-Expected Economic Performance
   • Despite inflation surging, global economic growth remained relatively strong in 2023, with global GDP growth recorded at 3.2%, only slightly below 2022’s 3.5%.
   • Growth exceeded expectations in several advanced economies (AEs) such as the United States and Japan, as well as in major emerging market economies (EMEs) like India, Mexico, and Brazil.
   • The feared global recession did not materialize, and growth projections for 2024 remained stable at around 3.0%.
2. Strong Labor Markets and Household Spending Support 
   • The labor market remained unusually strong, with unemployment rates staying close to pre-pandemic levels.
   • Despite aggressive monetary policy tightening, employment levels did not decline sharply, contrary to past tightening cycles
   • Higher wages, pandemic-era savings, and government support programs contributed to maintaining consumer demand, helping to offset recessionary pressures.
   • Labour market tightness supported household income and spending, preventing a severe contraction in demand.
3. Smooth and Controlled Monetary Policy Transmission  
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Financial System Stability and Absence of Major Crises
   • The global financial system remained resilient, avoiding widespread banking crises or financial meltdowns.
   • Unlike past tightening cycles, there were no significant systemic failures in the banking sector.
   • The Federal Reserve and other central banks provided clear policy guidance, reducing market panic and stabilizing investor expectations.
5. Emerging Market Economies (EMEs) were more Resilient
   • Unlike past monetary tightening cycles, EMEs managed to withstand the impact of higher global interest rates.
   • Improved monetary policy frameworks, stronger reserves, better financial regulation, and reduced currency mismatches helped EMEs maintain financial stability.
   • While some EMEs faced economic challenges, sovereign credit ratings remained stable, and capital outflows were controlled.
6. Fiscal Policies Provided Additional Cushion
   • Governments continued targeted fiscal support, such as energy subsidies and transfer programs, helping to shield households and businesses from the full impact of inflation and higher interest rates.
   • Fiscal stimulus remained selective but supportive, ensuring that economic activity was sustained.
7. Inflationary Pressures Began to Ease 
   • Inflation started declining as supply chain disruptions improved, energy prices stabilized, and monetary tightening took effect.
   • Falling commodity prices and a shift in global demand patterns contributed to disinflation.
   • The fading of pandemic-era distortions also helped realign supply and demand, reducing inflationary pressures. 
   Conclusion
   Despite concerns of a severe global recession, the economy avoided a deep downturn due to the combination of resilient labor markets, gradual monetary tightening, stable financial conditions, and strong household spending. While inflation surged, the global economy adapted effectively, and central banks managed to steer inflation down without triggering a full-scale economic collapse.

Key Factors Driving Global Disinflation Over The Past Year

The process of disinflation—the decline in inflation rates—over the past year has been influenced by several key factors, as outlined in the BIS Annual Economic Report 2024. These factors include monetary policy tightening, supply chain improvements, and shifting global economic conditions.

1. Aggressive Monetary Policy Tightening
   
   • Central banks worldwide implemented the most synchronized and intense monetary policy tightening in decades, raising interest rates to curb inflation.
   • The Federal Reserve, European Central Bank (ECB), and other major central banks raised rates significantly, slowing down demand-driven price pressures.
   • Despite initial concerns, the tightening was largely effective without causing major financial disruptions, allowing inflation to decline gradually
2. Easing of Supply Chain Disruptions
   
   • The post-pandemic recovery of global supply chains helped reduce production bottlenecks, which had previously contributed to inflation.
   • Improved shipping conditions, increased production capacity, and lower input costs led to a moderation in goods prices.
   • The resolution of supply chain issues resulted in lower core goods inflation, particularly in advanced economies.
3. Declining Commodity and Energy Prices
   
   • Prices of key commodities, including oil, gas, and food, retreated from their 2022 highs.
   • Energy prices fell, reducing headline inflation, particularly in advanced economies.
   • The impact of geopolitical disruptions on commodity markets was less severe than expected, contributing to overall price stability.
4. Demand Shifts and Spending Rotation  
   • The pandemic-induced shift in spending from goods to services helped moderate inflationary pressures in goods markets.
   • Consumers reallocated expenditures towards services, slowing demand for durable goods and easing price pressures in those sectors.
   • This natural adjustment in consumption patterns contributed to the broader disinflationary trend.
5. Anchored Inflation Expectations 
   • Clear and decisive central bank communication helped anchor inflation expectations, preventing long-term inflationary spirals.
   • Households and businesses adjusted their price and wage-setting behaviors based on expectations of falling inflation.
   • This limited the persistence of inflationary pressures, supporting a smoother disinflationary process.
6. China’s Disinflationary Impact 
   • Falling producer and export prices in China played a significant role in reducing global inflation.
   • China’s economic slowdown, weak domestic demand, and currency depreciation led to lower prices for exported goods, which translated into lower import prices for many countries.
   • This contributed to a global disinflationary impulse, particularly in goods markets.
7. Moderation in Wage Growth and Labor Market Adjustments 
   • While labor markets remained strong, wage growth did not accelerate uncontrollably, helping prevent wage-driven inflation.
   • Some wage pressures persisted, particularly in service sectors, but overall labor market conditions did not fuel excessive inflation.
   • Increased labor force participation and reduced job market frictions also contributed to a gradual decline in inflation.
     Conclusion
     The combination of monetary policy tightening, supply-side improvements, lower commodity prices, shifting demand patterns, and anchored inflation expectations helped reduce inflation without triggering a severe economic downturn. While some risks remain, disinflation has been largely successful, bringing inflation closer to central bank targets worldwide.

Policy Measures Implemented By Central Banks

The BIS Annual Economic Report 2024 highlights several policy measures undertaken by central banks worldwide to drive their economies toward achieving inflation targets. These measures focused on monetary tightening, fiscal coordination, and financial system stability.

1. Aggressive Interest Rate Hikes  
   • Central banks implemented the most synchronized and intense monetary policy tightening in decades.
   • The U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) raised policy rates to multi-decade highs to curb inflation.
   • Emerging market economies (EMEs), particularly in Latin America, were the first to hike rates, demonstrating preemptive tightening to prevent capital outflows and inflation spirals.
2. Managing Inflation Expectations through Forward Guidance   
   • Clear communication and transparency in policy decisions were key to anchoring inflation expectations.
   • The Federal Reserve maintained a firm stance, stating that rate cuts would only be considered once there was greater confidence in inflation returning to target.
   • The Bank of Japan (BoJ) adjusted its stance by raising policy rates for the first time since 2007, signaling confidence in achieving its 2% inflation target.
   • EMEs used targeted guidance to manage foreign exchange pressures and prevent inflation pass-through from currency fluctuations.
3. Fiscal Consolidation and Coordination with Governments  
   • Governments adjusted fiscal policies to complement monetary tightening efforts.
   • In some economies, fiscal stimulus was gradually withdrawn to avoid counteracting monetary policy efforts.
   • Fuel subsidies and price controls were phased out, ensuring that inflationary pressures did not persist due to government spending.
   • However, some fiscal expansion in the U.S. and Europe supported economic growth, balancing the risk of excessive tightening.
4. Prudential and Macro-Financial Policies to Strengthen Financial Resilience  
   • Central banks implemented prudential measures to enhance financial stability amid tightening cycles.
   • Stronger banking supervision and liquidity provisions were put in place to prevent instability, especially in response to vulnerabilities in U.S. regional banks and China’s property sector.
   • EMEs strengthened foreign exchange reserves and used intervention strategies to maintain currency stability.
5. Exchange Rate Management and Foreign Exchange Interventions  
   • Some Asian central banks (e.g., Bank of Indonesia and People’s Bank of China) intervened in foreign exchange markets to stabilize their currencies amid interest rate differentials with advanced economies.
   • Greater exchange rate flexibility in many EMEs reduced external vulnerabilities, helping to mitigate inflationary spillovers from global financial conditions.
6. Structural Reforms for Long-Term Inflation Control  
   • Beyond immediate monetary measures, central banks emphasized structural policies to improve supply-side efficiency and productivity.
   • Encouraging labor market flexibility, competition, and innovation helped in stabilizing prices over the long term.
   • Investment in energy efficiency and supply chain diversification were encouraged to reduce inflation volatility from external shocks.
   Conclusion
   Central banks tightened monetary policy aggressively through interest rate hikes, used forward guidance to anchor inflation expectations, coordinated with fiscal authorities, and enhanced financial stability measures. These combined efforts successfully drove inflation down toward target levels without triggering a full-scale recession.

Key Factors Driving Global Disinflation Over The Past Year

The BIS Annual Economic Report 2024 outlines how central banks’ monetary policy tightening to curb inflation had significant effects on equity prices, credit spreads, bond and equity volatilities, and bank lending. These impacts were shaped by interest rate hikes, changing investor expectations, and financial system resilience.

1. Equity Prices: Initial Decline, Followed by a Strong Recovery   
   • Equity markets initially declined as interest rate hikes led to higher discount rates, making stocks less attractive.
   • However, as inflation started to recede, equity markets rebounded, particularly in advanced economies (AEs) and major emerging markets (EMEs).
   • Technology stocks, particularly those tied to artificial intelligence (AI), surged significantly, driving valuation ratios above historical norms.
   • China was an exception, as equities slumped at the start of 2024 before showing partial recovery.
2. Credit Spreads: Narrowed Despite Rate Hikes   
   • Credit spreads (the difference between corporate and government bond yields) initially widened in response to higher interest rates and tighter financial conditions.
   • However, spreads later narrowed as investor sentiment turned optimistic, expecting a smooth economic landing and future interest rate cuts.
   • Investment-grade and high-yield bond spreads dropped below historical norms, reflecting strong market confidence despite the tightening cycle.
3. Bond and Equity Volatilities: Bond Market Volatility Remained High   
   • Bond market volatility remained elevated, reflecting uncertainty about future interest rate paths.
   • Unlike previous tightening cycles, bond volatility was higher than equity volatility, an unusual trend that persisted through 2023–2024.
   • Equity volatility, on the other hand, declined as markets priced in a controlled disinflation process.
   • The gap between bond and equity volatilities was the widest in 20 years, indicating strong uncertainty in fixed-income markets.
4. Bank Lending: Tightened Standards and Weaker Loan Demand   
   • Banks significantly tightened lending standards, reflecting concerns over economic slowdown risks and higher funding costs.
   • Loan demand declined across major advanced economies (AEs), especially in sectors sensitive to interest rate changes (e.g., real estate and consumer credit).
   • Credit growth was subdued, particularly in Europe and the U.S., where high interest rates discouraged borrowing.
   • Japan was an exception, where bank lending remained strong due to continued monetary easing policies.
   Conclusion
   The monetary policy tightening cycle led to initial equity market declines, higher bond market volatility, and tighter credit conditions. However, as inflation eased, investor optimism returned, equity markets rebounded, and credit spreads narrowed. Meanwhile, bank lending remained constrained, with higher rates reducing loan demand and tightening financial conditions.

Policies For Long-Term Sustainable Economic Growth and Low Inflation

The BIS Annual Economic Report 2024 outlines a comprehensive framework of monetary, fiscal, prudential, and structural policies necessary to ensure long-term economic stability, sustainable growth, and low inflation. These policies aim to balance inflation control, financial resilience, and economic expansion.

1. Monetary Policy: Maintaining Price Stability and Policy Flexibility  
   • Monetary policy must remain vigilant and to prevent inflation resurgence and should focus on gradual disinflation while avoiding unnecessary economic slowdown.
   • Central banks must avoid reducing policy rates too quickly, as premature easing could trigger inflationary pressures once again. It is preferable to maintain rates high enough to achieve price stability sustainably rather than risking another inflation surge.
   • Policymakers must maintain clear communication and forward guidance to anchor inflation expectations and prevent sudden market fluctuations.
   • Monetary authorities should ensure a smooth transition to a neutral policy stance, avoiding excessive tightening that could stifle growth.
   • Stop-and-go policies (abrupt shifts in interest rates) should be avoided, as they can reduce the central bank’s ability to manage inflation effectively. Instead, a gradual approach to adjusting policy rates is recommended.
   • Central banks must maintain a policy buffer to allow for future rate adjustments in response to economic downturns or unexpected inflation spikes.
   • For emerging market economies (EMEs), prudent use of foreign exchange reserves can help prevent capital flight and currency depreciation, particularly when there are large interest rate differentials between countries. However, foreign exchange intervention should complement—not replace—monetary and fiscal policy adjustments.
2. Fiscal Policy: Consolidation for Debt Sustainability and Growth Support 
   • Governments must implement fiscal consolidation to support disinflation and ensure long-term debt sustainability.
   • Governments should prioritize deficit and debt reduction to maintain financial stability and allow for lower interest rates over time.
   • Fiscal discipline is necessary to prevent excessive public debt burdens, which could become unsustainable as interest rates rise. Advanced economies (AEs) need to maintain budget deficits below 1.0% of GDP to stabilize public debt.
   • Government spending should be carefully targeted, focusing only on essential programs and avoiding unnecessary transfer payments, such as those introduced during the pandemic.
   • Growth-enhancing investments should be prioritized, such as infrastructure, green energy transitions, and labor development. These can boost long-term productivity while maintaining fiscal responsibility.
   • Tax policies should be adjusted to increase revenues, particularly in advanced economies. This can be achieved by raising corporate tax rates and expanding taxation on multinational corporations. For EMEs, tax system reforms and stronger enforcement could help improve revenue realization.
3. Prudential Policies: Strengthening Financial System Resilience 
   • Banks and financial institutions must maintain strong capital buffers to withstand future economic shocks.
   • Risk management frameworks must be enhanced to reduce exposure to financial imbalances that could trigger crises.
   • Regulatory authorities must be prepared to take swift action to address financial stress, ensuring that risks are contained before they escalate into broader crises.
   • The full implementation of Basel III regulations is critical, along with enhanced recovery and resolution mechanisms to strengthen the banking system.
   • Non-bank financial institutions (NBFIs) require better oversight, as they pose growing systemic risks due to complex leverage structures and liquidity mismatches.
   • Monitoring the risks in commercial real estate (CRE) and corporate debt markets is essential, as rising interest rates have created vulnerabilities that could impact financial stability.
4. . Structural Policies: Enhancing Productivity and Economic Competitiveness 
   • Structural reforms must be revived to support higher sustainable growth and improve income distribution.
   • Reforms should focus on increasing market competition, fostering innovation, and enhancing labor market flexibility.
   • Digital transformation, AI-driven technologies and green energy investments should be prioritized through global cooperation and investment strategies to create sustainable economic foundations.
   • Governments should remove barriers to trade and investment, ensuring global economic integration remains a growth driver.
   • Reforms should also focus on improving supply-side efficiency, reducing bureaucratic hurdles, and creating a more adaptive and resilient economy.
   Conclusion
   A combination of prudent monetary policy, disciplined fiscal management, robust financial regulations, and forward-looking structural reforms is essential for sustained economic growth and low inflation. By maintaining policy discipline while fostering innovation and resilience, economies can achieve long-term stability and prosperity.