Twenty central banks hold meetings as inflationary forces separate

The differences will be on full display this week with final decisions for 2021 due to the U.S. Federal Reserve, European Central Bank, Bank of Japan and Bank of England, which together are responsible for monetary policy in nearly half of the year. the global economy. They won’t be alone – around 16 counterparts are also meeting this week, including those from Switzerland, Norway, Mexico and Russia.

The last wild card is the omicron coronavirus variant – the severity of its impact on growth and inflation will be a critical consideration for those responsible in the New Year. Concern is that a strain more resistant to vaccines would force governments to impose further restrictions on businesses and keep consumers at home.

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Central Bank decisions this week (Photo: Bloomberg)

A change in policy always carries risks. The tightening and then the discovery of the inflationary threat were temporary from the start – as many central bankers have said from the start – could derail recoveries; waiting and finding that price pressures are persistent may require more aggressive tightening than not.

“The likelihood of political slippages is now much greater,” said Freya Beamish, head of macro research at TS Lombard. The outlook for inflation is confused by “the presence of an endemic virus,” she said.

Fed Chairman Jerome Powell is expected to confirm Wednesday that he will withdraw stimulus measures faster than expected just a month ago. He could even suggest he would be open to an earlier-than-expected interest rate hike in 2022 if inflation persists near its highest level in four decades.

The outlook for his central bank counterparts is less clear, marking the end of two years in which they largely synchronized their efforts to fight the coronavirus recession, only to find that inflation has picked up again stronger than expected in many years. many key savings.

Already huge

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Already huge (Bloomberg)

Stimuli from the Fed, ECB and BOJ significantly increased their balance sheets

Although she is likely to end the emergency measures, ECB President Christine Lagarde will maintain an expansionary policy stance on Thursday, as she insists that the price spike is due to factors that do not will not last, such as energy costs, supply problems and statistical oddities. Lagarde has indicated that she does not plan to hike rates in 2023.

Moderate price pressures in Japan also allow BOJ governor Haruhiko Kuroda to maintain a stubbornly dovish stance, even as the government launches another round of record spending. Japanese policymakers meet on Friday.

Perhaps more strikingly, Bank of England Governor Andrew Bailey is now chilling on the need to hike rates, after not long ago flirting with change. In contrast, the central bank of Norway could rise again.

Elsewhere, as the People’s Bank of China has started easing policy as a housing market slowdown threatens to dampen growth, other emerging economies such as Brazil and Russia are aggressively tightening.

Russia could do it again this week, as could Mexico, Chile, Colombia and Hungary. Yet Turkey is about to cut again at the behest of President Recip Tayyip Erdogan.

“We are ready to increase the divergence in monetary policies,” said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis SA.

What Bloomberg Economics Says …

“Rising global inflation, rising commodity prices and currency weakness have likely synchronized rate moves in emerging markets this year. Tightening US monetary policy will likely provide another global force for further rate hikes next year. “

– Ziad Daoud, Chief Emerging Markets Economist

Even if the rate path differs, a large-scale slowdown in bond buying programs will reduce support for economies. BofA Global Research strategists predict that liquidity will peak in the first quarter of 2022 and that the Fed, ECB and BOE are on track to reduce their balance sheets to $ 18 trillion by the end of next year , against more than 20 trillion dollars at the start of the year.

Implications for divisions in global politics could also include a rise in the dollar against a weakened euro and yuan, potentially fueling currency tensions as China’s exports take off again. A stronger greenback would also attract money from emerging markets, jeopardizing their own fragile recoveries.

“The hike in federal funds rates next year and a stronger US dollar will be a testing period for emerging markets,” said Jérôme Jean Haegeli, chief economist at Swiss Re AG in Zurich, and previously of the Monetary Fund international. “The fault lines opened by Covid-19 seem more persistent.”

On the Fed’s side, a widely awaited decision to end its bond purchases more quickly could allow it to hike its rates as early as March, if it deems it necessary to stem the surge in inflation.

Consumer prices in the United States rose the fastest in nearly four decades, government data showed on Friday.

Fed watchers expect the central bank’s new economic forecast to show for the first time that a majority of policymakers are forecasting at least one rate hike in 2022.

In the UK, traders convinced of a take-off this year have reduced their bets following the emergence of the omicron, and they are likely to be right if the comments of the most hawkish BOE official serve as a guide. Michael Saunders recently highlighted the benefits of waiting to increase rates by 0.1% to assess the economic impact of the variant.

The tight UK labor market is boosting wage growth nonetheless, and officials fear high inflation, which is set to peak at 5% next year, may creep into expectations. Unlike the Fed, the BOE’s mandate keeps it focused on prices.

At the ECB, Lagarde is also sticking to the narrative that record inflation will eventually subside – although officials admit persistent bottlenecks mean it may take longer than previously thought. initially, and that some policymakers feel uncomfortable standing idly by.

With the European economy close to pre-crisis levels, the institution is expected to confirm that bond purchases under its € 1.85 trillion ($ 2.1 trillion) pandemic program will end in March as planned. Regular asset purchases will continue. Rate hikes, according to economists polled by Bloomberg, will not be on the agenda until 2023.

Ultimately, the severity of the omicron will play a huge role in the history of monetary policy next year. Two weeks after the discovery of the variant, there are many unknowns.

“If the variant dampens demand more than it exacerbates supply chain disruptions, it could prove to be disinflationary,” said economist Sian Fenner of Oxford Economics. “But the reverse is just as true.”

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