Inflation could spike this year, putting pressure on central banks to raise the cost of government borrowing to post war highs, according to the Bank of International Settlements, which warned of “daunting” issues confronting policymakers during the post-pandemic recovery. With UK government debt spiralling to £2.2tn due to the costs of the pandemic, a jump in interest rates to levels last seen in the 1990s could more than double the cost of national borrowing. Swiss headquartered BIS, often dubbed the central bank’s central bank, said in the short term national money policymakers should maintain ultra low interest rates to maintain the post-pandemic recovery. The warning came in its annual economic report, which was released Tuesday. However, they should signal to financial markets and consumers that they will prevent inflation becoming a persistent problem, if necessary with a hike in interest rates. “The uneven recovery creates daunting challenges for policymakers,” the BIS report said. “The sustainability of debt can change if interest rates start increasing,” Agustin Carstens, the BIS general manager added. “You don’t want to be surprised.” The report contains predictions for various nations, including the UK, based on a variety of scenarios. In one of the bleaker forecasts, BIS said UK interest rates could return to 1990s levels, which average 6%, increasing the current levels of annual debt servicing from £47bn to nearer £100bn a year. Inflation has increased across much of the global economy as governments have eased lockdown measures and vaccination programmes have allowed more people to shop and mothballed businesses to reopen. Annual price increases reached 5% in the US last month and trebled over two months in the UK to reach 2.1% in May. House prices in the UK are growing at their fastest rate in 17 years, data released Tuesday by Nationwide showed, with the annual price increase jumping to 13.4% in May. Some economists, including former Bank of England governor Lord King and the Bank’s ex-chief economist Andy Haldane, haveargued for an increase borrowing costs to limit consumer spending power and ease the upward pressure on inflation. However, the majority of academics and City economists believe some of the main drivers of inflation, including shortages of raw materials and essential components in cars and computers, are unlikely to persist into next year. The BIS report stated: “As inflation concerns persist, communication will be tested to the fullest. Central banks face a delicate balancing act. “On the one hand, they need to reassure markets of their continued willingness to support the economy as necessary. On the other, they also need to reassure them of their anti-inflation credentials and prepare the ground for normalisation.” Asked if that meant central banks should react now to calm inflation, Carstens told Reuters: “It would not be appropriate to tighten monetary policy today just to reduce measured inflation and sacrifice a recovery of the economy,.” Referring to bottlenecks in supply chains that have delayed shipments of goods around the world, he added: “As of today, we at the BIS consider that it will most likely be temporary.” The US Federal Reserve came under fire earlier this year for appearing to say that it would maintain low interests even if inflation increased and remained at elevated levels for several years. Earlier this month chairman Jerome Powell appeared reverse that policy by saying interest rates would begin to rise in 2023, based on its forecast of the recovery. Carstens, who headed Mexico’s central bank before joining the BIS, said high levels of inflation would lead to a “substantial tightening in global financial conditions,” making it more expensive for companies and governments to borrow and causing markets to pull money out of developing countries. “The main challenge (for the rest of the year) is how to coordinate market expectations with the conduct of policy.” Carstens said. “I think one of the hiccups we saw in the last months was the market going ahead of the Fed,” he said. The report also looked at how Covid’s disproportional damage to lower-paid workers and the leap in stock markets driven by trillions of dollars of stimulus was intensifying concerns about inequality. These concerns have been increasing since the financial crisis more than a decade ago. The current surge in global house prices – another of the BIS’s main macro economic concerns at present – typically favours the old at the expense of the young. “It would be unrealistic, and indeed counterproductive, to gear monetary policy more squarely towards tackling inequality,” the BIS said, as it could reduce some of the flexibility needed to help economies and control inflation, both of which should help to reduce inequality longer-term.