At year-end meetings, major central banks may diverge on inflation, أوmicron – News Couple

At year-end meetings, major central banks may diverge on inflation, أوmicron

Dec 14 (Reuters) – Major central banks meet this week to assess the risks posed by a new variant of Omicron for the coronavirus even as they consider reducing emergency measures taken nearly two years ago to combat the pandemic’s economic toll.

The Global Balance Act begins on Tuesday when the Federal Reserve holds its last two-day meeting, and includes new monetary policy statements by the US central bank on Wednesday, the European Central Bank and Bank of England on Thursday, and the Bank of Japan. on Friday.

Everyone faces a version of the same dilemma – whether the need to protect against inflation, end the current era of low interest rates and buy central bank assets is more urgent than the economic threat posed by the new variable – but their different approaches could lead to a tumultuous year.

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Inflation, labor markets, and the relationship between the virus and economic performance behave differently across major economies, leading to a potentially sharp divide over how central banks will manage the next phase of the pandemic. This contrasts with the simultaneous and massive wave of support approved at the start of the health crisis in the spring of 2020.

The Bank of England recently seemed on the verge of raising interest rates in a sign of rising inflation, but policy makers have decided their course due to the rapid spread of Omicron and the imposition of new restrictions in the country. They are now expected to hold their position on borrowing costs at their meeting this week in a reminder of the pandemic’s critical role.

Michael Saunders, one of two policymakers at the Bank of England who voted for a rate hike in November, said earlier this month that “there may be particular merits pending seeing more evidence of (Omicron’s) potential effects on public health outcomes.” Hence the economy.” Since then, the risks of the alternative to the UK economy have intensified.

The European Central Bank is likely to continue, and the Bank of Japan may begin to cut some of its pandemic bond purchases on the margins, temporary steps that reflect lower inflation and a lower economic recovery in the Eurozone and Japan. Interest rate increases for both are likely to be off.

In the case of the European Central Bank, it must be aware of the main differences within the bloc it sets policy for. Any significant retreat from crisis support could have undesirable consequences, for example, for the sustainability of high debt burdens in economies such as Italy.

For Japan, the inflation that is tearing apart other parts of the world remains largely absent. As such, only a marginal decrease in corporate asset purchases is being discussed.

In the meantime, the Fed is likely to ramp up a policy shift that could intensify over the next year and arguably pose the biggest risk of an upsetting surprise.

The US central bank is dealing with inflation that has already reached more than double its official 2% target and is persistent enough that policymakers have shrugged off calling it “temporary”. While the US labor market is still several million jobs below its pre-pandemic peak, a low unemployment rate and rising wages could signal full employment approaching.

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Facing the Unknown

Nearly two years after the pandemic upended economic expectations, the level of uncertainty remains high, as the fate of global financial markets is tied to seemingly local issues such as whether more people start looking for jobs in the United States, said Gian Maria Melese Ferretti. . D., a former deputy director of the International Monetary Fund’s research division, and now a senior fellow at the Brookings Institution’s Hutchins Center for Fiscal and Monetary Policy.

If participation in the US labor force remains stalled and policymakers conclude that they have hit full employment, “the Fed will likely have to tighten more quickly” than expected, disrupting global asset markets and pulling back hard on developing countries as dollar costs rise. . He said painfully.

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The Fed this week is expected to speed up ending its monthly purchases of Treasuries and mortgage-backed securities so that the bond-buying program ends by March instead of June. But the decision may give less indication about what will come from the Fed’s new policy statement description of US inflation, how officials are changing their outlook for interest rates and the economy, and in the tone that Fed Chair Jerome Powell will take at his next meeting. Press Conference.

The Fed chair faces the same unknown as his colleagues: Will the new alternative increase global supply chains and raise inflation? Destroying consumer spending and jobs in the new downturn? All of what? Or will it have little or no economic impact?

Investors are already expecting the Fed to agree to three 0.25 percentage point increases in 2022. Those bets have only increased since Omicron was identified last month, evidence that the policies and economics of high inflation in the United States is currently affecting the economy more perceived. risk of a new outbreak.

At the policy meeting in September, Fed officials were evenly divided over whether a one-time rate hike next year was needed. With unemployment improving faster and inflation rising more than officials expected at that meeting, analysts say officials now have to play a catch-up role in both their economic outlook and the projected path of interest rates.

“It’s clear that Omicron is throwing some uncertainty” into the Fed’s calculations, said Jay Bryson, chief economist at Wells Fargo. Bryson expects inflation to subside in mid-2022, allowing the Federal Reserve to wait until the second half of the year to raise its benchmark overnight rate and end the year with two rate hikes of just 0.25 percentage points.

“If we’re wrong, the Fed will have to step it up, and if they move really fast, that’s when you have the policy error,” Bryson said.

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Additional reporting by Laika Kihara in Tokyo and Palaz Kourani in Frankfurt. Editing by Dan Burns and Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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