"Central banks face a difficult dilemma because these inflation pressures have come to the surface just when downside risks to growth have increased," Knight warned.
However, he said, they should concentrate on keeping inflation under control rather than worrying about slowing growth: while it was possible "that global growth might slow, in response to unwinding imbalances and the recent financial turmoil," he said, "in most countries, it would seem imprudent from an inflationary perspective to rely heavily at this stage on such an outcome".
The BIS annual report, written by chief economist Bill White, pointed out that the events of 2007 were more than simply a collapse of the subprime mortgage market, but reflected a general credit bust. Weakened balance sheets meant that the world faced "persistent headwinds for economic activity", he wrote, and "a deeper and more protracted global downturn than the consensus view seems to expect".
The report also highlighted disjointed action by central banks around the world, which could have exacerbated the crisis.
Also today, Knight announced that he would be taking leave as of tomorrow, and would not return to the BIS before his resignation on September 30. In the meantime his place will be taken by the deputy general manager Hervé Hannoun. White steps down tomorrow to be succeeded by Stephen Cecchetti, a professor of finance at Brandeis University in New York.
Bank practices undermined liquidity, says BIS