The Bank for International Settlements (BIS) has said that central banks need to take “timely and decisive action” to restore low and stable inflation while limiting impact to growth and safeguarding financial stability.

It warned that the “risk of stagflation” is looming over the global economy as the threat of a “new inflation era” happens at the time time as growth weakens and financial vulnerabilities increase.

The organisation called on policymakers to launch reforms to support long term-growth and “lay the groundwork for more normal fiscal and monetary policy settings”.

“The key for central banks is to act quickly and decisively before inflation becomes entrenched,” said general manager Agustín Carstens. “If it does, the costs of bringing it back under control will be higher.

“The longer-term benefits of preserving stability for households and businesses outweigh any short-term costs.”

A recent report published by the BIS urges central banks to restore low and stable inflation as a priority in order to minimise the hit to economic activity.

It said that while a repeat of the 1970s stagflation was unlikely due to improved policies, better frameworks, and less reliance on energy, the current backdrop of financial vulnerabilities - including high debt and overvalued asset prices - could "magnify" any slowdown.

“The near-term challenge of ensuring low inflation co-exists with the long-standing one of regaining future safety margins in macroeconomic policies,” said Claudio Borio, head of the BIS Monetary and Economic Department. “Pressures on fiscal policy are mounting.

"This complicates the task for monetary policy and highlights the importance of reforms to support long-term growth.”

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