Disagreements in response to the threat of inflation


The response of large central banks to the surge in inflation this week was marked by the divergence between English-speaking economies and the euro zone.The Bank of England, which surprised the market by maintaining interest rates last month, once again confused investors this time Raise them, Although the Omicron coronavirus variant brings uncertainty. The Federal Reserve has accelerated the reduction of its bond purchase program, Changed the forecast In terms of interest rates, officials have hinted that they expect to raise interest rates three times next year.

In contrast, the European Central Bank’s decision is More balancedIt announced that it would end its previously implied emergency quantitative easing program by March, but promised to increase its regular asset purchase program to smooth the reduction in the second and third quarters of next year. It also extended the period for which it plans to fully reinvest its holdings. As a result, the European Central Bank’s balance sheet will continue to expand in the medium term, albeit at a slower pace.

This division makes sense. Prices in English-speaking countries have increased even more. Excluding fluctuating food and energy prices, the “core” inflation rate is much higher in the United Kingdom and the United States, at 4% and 4.9%, respectively, compared to 2.6% in the Eurozone. Before the pandemic, there were signs that the Eurozone was in a Japanese-style low-inflation trap. It is too early to say that once the inflation factor disappears, we will get out of the predicament.

Surprisingly, however, it seems that no central bank has really changed the (very similar) way they think the economy and inflation operate. All three expect inflation to weaken in the second half of next year. All of these cited the same epidemics and supply chain related factors. In this sense, this week’s decision should be welcomed.

Therefore, small monetary policy tightening in the United Kingdom and the United States should not lead to expectations that the overall tightening will be much larger or faster than previously expected. These central banks will continue to fine-tune their policies according to the economic development of each country. If inflation slows sharply next year-which is an optimistic assumption-they may remain for some time. On the contrary, if inflation remains high, the European Central Bank is ready to take a tighter stance.

The other side of this fine-tuning is that there are almost no adjustments to the arrival of Omicron. This may be fair; the severity of this variant is unclear. If Omicron increases supply chain issues but spending remains the same, it may also increase inflationary pressures. If things are not good and demand drops sharply, the US and Bank of England may be forced to change their tunes, or even their decisions this week. If it is not the most comfortable posture, it will be the right approach.

This week’s decision first illustrates how difficult it is to formulate monetary policy when the outlook is very uncertain and very unstable. Handling data to the best of their ability may make central bank officials appear hesitant or indecisive, or weak in the face of pressure. As the Fed has discovered, sticking to its own analysis can lead to accusations that turn a blind eye to the obvious. Like the Bank of England, trying to be flexible-if it means disrupting market expectations-can lead to being called an “unreliable boyfriend”, despite the fact that people have questions about the Bank of England’s performance in communicating its changes in thinking. doubt.It has scope Waiting for clarification, But the choice was raised from record low interest rates to still very low levels.

Overall, the decisions of the three banks are reasonable. If the pandemic takes a dramatic turn again, they may seem incompetent. This is their misfortune.



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