FFinancial markets fear that the world’s major central banks risk an ‘economic catastrophe’ by misjudging the threat of rising inflation and failing to turn off the stimulus taps that have flooded the global economy with silver .
From the Federal Reserve to the European Central Bank, policymakers are grappling with a decades-long unprecedented surge in prices while trying to keep faltering economies on track to recovery from the ravages of the coronavirus pandemic.
While central banks largely stick to the mantra that inflation is ‘transient’ and the pressures on prices for everything from timber to turkeys will ease in the months to come, economists, business leaders and business and investors are sounding the alarm bells.
They fear that without swift action, such as a hike in interest rates, runaway inflation – which has not been seen in developed economies since the early 1980s – will become so entrenched by the end of the 1980s. next year that a policy change will be too late to have any effect. . At the very least, they see this as a critical time to end the massive money-printing programs that have been stepped up to counter a pandemic recession.
Julian Jessop, a freelance economist who worked in UK treasury and city companies, said most central banks were “way behind schedule” and rising costs along the supply chain, as in maritime transport, would continue to exert upward pressure on prices. well into next year.
“Central banks must react to changing economic conditions,” he said. “The recession that justified further quantitative easing and keeping interest rates at emergency low levels is over.”
Since interest rates were at record highs, modest increases “would not be an economic disaster, but should help avert one,” Jessop added.
“Interest rates and borrowing costs should stay close to their historic lows, especially real rates, after accounting for inflation. In reality, central banks would simply take their foot off the accelerator, rather than slamming on the brakes. “
Poland, where inflation hit 6.8% in October, its highest in 20 years, decided to attack immediately. Polish Prime Minister Mateusz Morawiecki said on Thursday the government would cut taxes on fuel and energy from December and offer bonuses to hardest hit households.
Describing the move as an “anti-inflation shield”, he said it would cost the government around 10 billion zlotys (£ 1.8 billion) and that additional funds would come from spending cuts.
Morawiecki blamed inflation, which hit 6.8% in October, its highest since 2001, on rising energy costs, saying they stem from Russia’s gas policy, the policy climate change and the prices of CO2 emission certificates, as well as bonuses paid to help companies survive the Covid-19 pandemic.
Food, fuel and energy prices have gone up. “We are proposing a significant tax cut, in order to cushion the effects of inflation,” Morawiecki said, adding that inflation could rise further during the winter months from December to March.
Inflation has been stalking the global economy for months but has come to light in recent weeks. The 6.2% jump in inflation in the United States by October stunned markets and highlighted huge increases in the cost of some commodities, such as a 46% rise in oil prices and 11% for meat, fish and eggs. In the United Kingdom, inflation is in full swing at 4.2%, inflated by record natural gas prices.
With pandemic-induced supply constraints set to continue for months and a wave of pent-up Covid consumer cash chasing a limited flow of goods, claims by Federal Reserve Chairman Jerome Powell that inflation is on the rise. transient seem more and more hollow.
Chris Watling, CEO and founder of consultancy firm Longview Economics, agrees central banks risk being trapped.
After the 2008 financial crisis, they pursued a loose monetary policy and a restrictive fiscal policy in the form of quantitative easing and spending cuts. Now they have “loose money and tax,” with too much money for too little property.
“They will wake up one day catching up,” he said. “Maybe at the end of next year, or 2023, and they’ll eventually tighten up pretty quickly when prices go up. And if you get into this situation, a bubble, it will burst. It is therefore a real challenge for them.
Mohamed El-Erian, global economist for insurance group Allianz, said if the Fed left too much time to raise rates, the United States – and possibly the world – could be plunged into recession. “Such a tightening would potentially coincide with three other forces of contraction in the United States: tighter financial market conditions, the absence of any further fiscal stimulus and the erosion of household savings.”
It is a precarious tightrope for policy makers. Inflation can quickly undermine business and consumer confidence, but going too far could jeopardize the recovery and could also seriously scare off booming real estate markets in countries like the US, UK and Australia. .
El-Erian said policymakers should also consider broader changes to boost productivity and improvements to financial stability risk monitoring, especially in the non-banking sector.
Some central banks are already preparing to jump a tightrope, including the Bank of England, which almost raised interest rates earlier this month. The worrying inflation number in the United States means policymakers seem certain to take the plunge and hike rates by 0.25 percentage points to 0.35% when they meet again in the first week of December.
Rising prices exposed central bankers’ ‘King Canute’ inflation theory, former Bank Governor Mervyn King said this week in a violent attack on how policymakers around the world have responded. 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 calm inflation to 4.9 % last month. Across the Tasman Sea, the Reserve Bank of Australia reiterated its belief that rates would not rise from their all-time low of 0.1% until 2023 at the earliest, but markets bet they’re at 1% this time around next year. Lenders are voting with their feet, however, as the largest bank, the Commonwealth, hikes fixed rates on Friday for the third time in six weeks.
South Korea’s central bank followed New Zealand’s lead, announcing a 1% hike – its second increase of the year – amid concerns over rising costs of living. The country’s inflation rate hit 3.2% in October, a nearly 10-year high.
Alex Joiner, the chief economist of IFM Investors in Melbourne, said central banks were trying to wait and “hopefully” that pressures from the pandemic would continue to ease as supply problems wore on. resolving on their own.
“They’re trying to temper market expectations, but the problem is, the markets don’t believe them,” he said. “Market prices are aggressive, with investors showing they think rates will go up.”
The Fed’s cautiously optimistic view prevails for now, and Joiner and Watling are signaling signs of easing in supply chains. The benchmark of global shipping costs, known as the Baltic Index, is on the decline and China is starting to overcome power shortages that plagued its giant manufacturing sector in September.
However, it is also possible that everyone has underestimated the scale of the structural changes in the global economy that have started 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 “right”.
John Studzinski, managing director and vice chairman of Pimco, the world’s largest bond trader, told a recent Bloomberg forum that higher inflation could persist for three to five years. Supply chains must be restored as the world emerges from the pandemic crisis, he said, and with some de-globalization of trade, inflation “could be very volatile.”