‘Wake up’: markets warn central banks to get a grip on inflation

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FFinancial markets fear that the world’s major central banks are risking an “economic disaster” by mistaking the threat of rising inflation and not closing the stimulus tap that is flooding the global economy with money.

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From the Federal Reserve to the European Central Bank, policymakers have been battling price jumps for decades while trying to keep economies faltering as the coronavirus pandemic ravages them.

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While central banks largely stick to the mantra that inflation is “temporary” and that price pressures on everything from wood to turkey will ease in the coming months, economists, business leaders and investors are sounding alarm bells.

He fears that without prompt action, such as raising interest rates, runaway inflation – which has not been seen in developed economies since the early 1980s – will become so embedded by next year that the policy switch has to have any effect. I will be too late. At the very least, they see it as a crucial moment to end the massive money-printing schemes that were designed to combat a pandemic recession.

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Julian Jessop, an independent economist working at UK Treasury and Citi firms, said most central banks were “well behind the curve” and rising costs in the supply chain, such as in shipping, would continue to put upward pressure on prices. . well next year.

“Central banks need to respond to changing economic conditions,” he said. “The recession that justified additional quantitative easing and kept interest rates at emergency lows is over.”

Noting that interest rates were at record lows, the modest increase “would not be an economic disaster, but should help prevent one”, said Jessop.

“Interest rates and borrowing costs are still likely to remain near historic lows – especially real rates, once inflation permits. In fact, central banks may simply be stepping off the accelerator rather than applying the brakes.”

Poland, where inflation hit 6.8% in October, the highest for 20 years, has decided to go on the attack immediately. The Polish prime minister, Mateusz Morawiecki, said on Thursday that the government would cut taxes on fuel and energy from December, and offer bonuses to the hardest-hit families.

Describing the move as an “anti-inflation shield”, he said it would cost the government about 10 billion zlotys (£1.8 billion) and that additional money would come from spending cuts.

Morawiecki blamed inflation, which hit 6.8% in October, on energy costs, the highest since 2001, saying they were at odds with Russia’s gas policy, the EU’s climate policy and CO2 emissions certificate prices. stems from bonuses paid out. Help businesses survive the COVID-19 pandemic.

Prices on food, fuel and energy have risen. “We are offering a major tax reduction to mitigate the effects of inflation,” Moraviki said. Inflation may still pick up in the winter months of December to March.

Inflation has been chasing the global economy for months but has burst into the open in recent weeks. A 6.2% jump in US inflation in October stunned markets and highlighted a sharp rise in the cost of some consumer basics, such as a 46% increase in petrol prices and 11% for meat, fish and eggs. Growth. In the UK, inflation is heating up at 4.2% due to record natural gas prices.

With pandemic-induced supply constraints continuing for months and limited inflows of goods chasing a wave of post-Covid consumer cash, Federal Reserve Chairman Jerome Powell claims inflation is fleeting and looks increasingly hollow.

Chris Watling, chief executive and founder of advisory firm Longview Economics, agrees that central banks are at risk of getting caught.

After the 2008 financial crisis, he adopted loose monetary policy and tight fiscal policy in the form of quantitative easing and spending cuts. Now they have “loose monetary and loose fiscal”, in which too much money chases too few goods.

“They will wake up one day in the catch-up phase,” he said. “Maybe at the end of next year, or 2023, and then when prices are going up, they will harden very quickly. And if you tighten in that situation, a bubble, that will burst. So it’s a real challenge for them.” Is.”

Mohamed El-Erian, global economist at insurance group Allianz, said that if the Fed left it too late to raise rates, the US – and perhaps the world – could be pushed into recession. “Such a tightening would likely coincide with three other contractionary forces in the US: tightening of market financials, the absence of any additional fiscal stimulus, and the erosion of household savings.”

This is an uncertain link for policy makers. Inflation can rapidly undermine business and consumer confidence, but going too hard could jeopardize recovery and seriously take on fast-moving property markets in countries such as the US, UK and Australia.

El-Erian said policymakers should consider sweeping changes to increase productivity, and improve monitoring of financial stability risk, particularly in the non-bank sector.

Some central banks are already preparing to take tough measures, notably the Bank of England, which came close to raising interest rates earlier this month. The ominous US inflation numbers mean policymakers are sure to increase rates by 0.25 percentage points and 0.35% when they meet again in the first week of December.

Rising prices have exposed central bankers’ theory of “king canute” inflation, former bank governor Mervyn King said this week as policymakers around the world reacted to the COVID-19 crisis.

New Zealand doesn’t often attract the attention of markets, but this week the country’s Reserve Bank announced the second rate hike in as many months in an effort to quell inflation, which hit 4.9% last month. Across the Tasman Sea, the Reserve Bank of Australia reiterated its belief that rates will not rise from their record low of 0.1% until 2023 at the earliest, but markets are betting on 1% this time next year. Lenders are voting with their feet, however, with the largest bank, the Commonwealth, on Friday raising fixed rates for the third time in six weeks.

South Korea’s central bank followed New Zealand’s example by announcing a 1% increase – its second increase of the year – amid concerns over higher living costs. In October, the country’s inflation rate reached 3.2 percent, the highest level in nearly 10 years.

Alex Joiner, chief economist at IFM Investors in Melbourne, said central banks were trying to wait it out and “hope against hope” that the pressure from the pandemic will continue to ease as supply issues are resolved.

“They are trying to lower the market’s expectations but the problem is the markets are not believing them,” he said. “Market pricing is aggressive, with investors showing they think rates will go up.”

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A cautiously optimistic Fed outlook prevails for now, and both Joiner and Watling point to an easing in supply chains. The benchmark for world shipping costs, known as the Baltic Index, is falling, and China is beginning to address the power shortages that plagued its vast manufacturing sector in September.

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However, there is also the possibility that everyone may have underestimated the extent of structural changes in the global economy that began in recent years and have been accelerated by COVID. This could mean that there will never be a return to the Goldilocks era when inflation and growth were both “perfect”.

John Studzinski, managing director and vice president of Pimco, the world’s largest bond trader, recently told a Bloomberg forum that high inflation could persist for three to five years. Supply chains need to be re-established as the world emerges from the pandemic crisis, he said, and with some disruption of trade, inflation “could be very volatile”.

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