Just as many central banks planned to normalize the monetary policy as economies emerged from the coronavirus pandemic, Russia’s invasion of Ukraine knocked the efforts sideways.
Last week, the U.S. Federal Reserve approved its first interest rate hike in more than three years and penciled in further increases at its six remaining policy meetings this year as it looks to tame the inflation.
The Bank of England imposed its third consecutive rate hike. Still, it struck a relatively peaceful tone, with the Russia-Ukraine conflict and mounting pressure on energy prices that will keep inflation higher for longer.
Last week, European Central Bank President Christine Lagarde said that policymakers have “extra space” between the planned end of the ECB’s quantitative easing program this summer and a first hike to the cost of borrowing in more than a decade.
Economists suggest that tightening policy even as the conflict threatens growth and financial conditions and the labor market tightens, central banks could inadvertently trigger “stagflation.”
However, most seem to have prioritized reining in inflation over concerns about economic growth and have remained undeterred so far by the potential impacts of the war.
“Yet a year on, inflation is now running at multi-decade highs, and labor markets have staged a remarkable recovery. ‘Patience’ has been abandoned – ‘optionality’ is the new buzzword,” Hugh Gimber, global market strategist at JPMorgan Asset Management, said.
“Further policy tightening lies ahead, and the central banks want the option to move more quickly if inflationary pressures don’t show signs of easing.”
Mario Centeno, Portuguese central bank governor and member of the ECB Governing Council, told CNBC last week that the conditions for a rate lift-off had not yet been met, with the normalization process remaining “neutral” and “data-dependent.”
“Even if it’s not probably the most likely scenario today, a scenario with low growth and high inflation is not out of the possibilities in the near future, and we must be very careful,” he added.
Photo by Foto-Rabe from Pixabay
