SINTRA, Portugal (Reuters) – The world’s top central banks may need longer to get inflation back down to target and a fresh bout of financial turbulence could make the process even more protracted, the International Monetary Fund’s second-in-command said on Monday.

Central banks have raised interest rates at a brisk pace over the past year-and-a-half to fight off a historic surge in prices, but they have persistently underestimated inflationary pressures.

Describing what she called uncomfortable truths, Gita Gopinath argued that the financial community may be too optimistic about the cost and difficulty of taming inflation, which then raises the sort of stability risk central banks might not be equipped to handle.

“Inflation is taking too long to get back to target,” Gopinath told the European Central Bank’s annual get-together in Sintra, Portugal. “While headline inflation has eased significantly, inflation in services has stayed high, and the date by when it is expected to return to target could slip further.”

Such a delay would be costly, so central banks need to keep policy tight, despite an obvious cost to growth, she said.

The problem is that investors seem overly optimistic about the inflation path and do not see much of a hit to economic growth, an unlikely combination, especially if high rates persist for longer than currently predicted, Gopinath argued.

“It is useful to bear in mind that there is not much historical precedent for such an outcome,” she said.

Once the reality hits, asset prices could reprice, potentially setting off the sort of financial turbulence seen around the collapse of Silicon Valley Bank and the sale of Credit Suisse earlier this year, she warned.

While central banks have been adamant that they have the tools to manage both price and financial stability risks, the reality is that their powers are limited when financial stress threatens to morph into a systemic crisis, she added.

It is then up to governments to forestall a crisis but their fiscal capacity is quite limited now, so central banks may need to let inflation come down even more slowly to avoid their own policy triggering a crisis.

“Financial stresses could generate tensions between central banks’ price and financial stability objectives,” Gopinath said. “While central banks must never lose sight of their commitment to price stability, they could tolerate a somewhat slower return to the inflation target to avert systemic stress.”

Still, for now, policy is not tight enough and central banks need to expect more persistent price pressures than in the past decade, that was characterised by anaemic price growth, Gopinath said.

“Monetary policy should continue to tighten and then remain in restrictive territory until core inflation is on a clear downward path,” Gopinath said.

(Reporting by Balazs Koranyi; Editing by Christina Fincher)

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