Central Banks Bet Economies Tolerate Omicron, Not Inflation


This week, the Fed, ECB and BoE all seem less worried about Covid. They see less damage to the application; focus on supply risk for prices

Philip Aldrick and Rich Miller, Bloomberg

December 17, 2021, 6:55 PM

Last modification: December 17, 2021, 7:10 PM

Chart: Bloomberg


Chart: Bloomberg

Major central banks made a big call this week, deciding the coronavirus was no longer driving their economies and inflation was now the biggest threat.

For nearly two years, the main challenge for monetary authorities has been anticipating where the pandemic’s next blow might land – and cushioning its impact on economic growth and jobs.

No more. Over the past two days, central banks in the United States and Europe have pivoted — at varying speeds — toward tighter policy. They now see controlling prices as a higher priority than protecting production and employment from further pandemic fallout.

The Bank of England on Thursday became the first central bank in a Group of Seven economy to raise interest rates since the arrival of Covid-19. The Federal Reserve announced on Wednesday that it was bringing forward the end of its bond-buying program and announced three rate hikes next year. The European Central Bank is also ending emergency measures.

“It doesn’t look like the Fed or other central banks see the need to ignore the very strong signals and high inflation numbers they’ve seen just because of Covid,” says chief strategy officer Mark Cabana US interest rates at the Bank of America. “In fact, we are seeing the opposite actions.”

Behind this change is an assessment that, although Covid-19 will not disappear, Western countries are discovering how to live with it – and the impact on economies of each viral mutation will be lower than the last.

“Many people have been vaccinated and recall campaigns have accelerated,” ECB President Christine Lagarde said on Thursday. “Society has become more apt to cope with pandemic waves and the consequent stresses. This has mitigated the impact of the pandemic on the economy.

Moreover, as central bankers learned more about pandemic inflation, they came to a different view of the impact of new virus outbreaks on the economy.

Early in the crisis, the focus was on lockdowns as a shock absorber for consumer demand – which accommodative monetary policy could help support. Now officials are also concerned about how health restrictions are curbing the supply and transportation of goods, driving up prices and bolstering the case for higher interest rates.

“Previous economic frameworks have been about what happens to demand growth,” says Sanjay Raja, an economist at Deutsche Bank in London. “Now it’s about the impact on demand versus the impact on supply. That changes the math.”

Not all show speed. On Friday, the Bank of Japan announced that it would only slowly withdraw its pandemic aid. It extended loan assistance for struggling small businesses by six months.

For those who pivot, it’s clear from the havoc wrought by the omicron variant that there’s a lot of risk in shifting gears.

Especially in Europe, governments are reimposing some of the restrictions – from advice on working from home to travel restrictions – that they lifted earlier in the year, as cases spread rapidly and hospitals fill up again. . Criticized for being too comfortable with inflation in recent months, there is a risk that officials are downplaying the ongoing pandemic too much now.

Yet at press conferences this week, central bankers made it clear they saw Covid risks diminishing – as their tolerance for price pressures ran out.

On Wednesday, Chairman Jerome Powell dismissed a suggestion that the Fed should hold off on ending its so-called cut by March due to the latest virus threat. “Omicron doesn’t have much to do with it,” he said.

Powell acknowledged that there are a lot of unknowns surrounding the new variant. He pointed out that the latest to spread across the world has hurt the supply of economies as well as the demand for crimping.

“Delta had the effect of slowing down hiring,” Powell said, but also “harmed the process of building global supply chains.”

These disruptions, coupled with strong consumer demand supported by government spending to protect households during the pandemic, are what have pushed inflation to multi-year highs in Western economies.

Central bankers argued until recently that the price spike would not last long – a position they are now moving away from.

They fear the supply chain lockdowns and labor market changes triggered by Covid-19 will be here for some time – and if inflation takes hold, households and businesses could come to a standstill. anticipating more of the same, and that expectation might prove its worth. -satisfactory.

Indeed, central banks are now betting that it is new waves of the virus – or at least their economic impact – that will prove to be transitory.

Warning: This article first appeared on Bloomberg and is published by special syndication agreement.


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