Confusing supply chains, rising commodity prices, and skyrocketing consumer demand have collectively driven prices up rapidly in many wealthy countries, prompting central banks around the world to start rolling back some of the extraordinary economic support measures they took during the pandemic.
In the United States, the Federal Reserve is expected to announce a plan to slow large-scale asset purchases on Wednesday, a process that officials want to complete before cutting interest rates. Markets increasingly expect the Fed to start raising interest rates from near zero in the second half of 2022.
The Bank of England has moved even further: investors expect that it will be able to raise its key interest rate as early as Thursday. And in Canada, Australia, Norway and elsewhere, monetary authorities have also begun to cut support or lay the foundation for a move away from political aid.
The rejection of full-scale economic stimulus is taking place against the backdrop of a surge in inflation unprecedented in the 21st century. Price gains have been chronically weak for decades, but this year they have sharply surpassed the 2 percent rate that advanced central banks are targeting, in part because government aid helped families spend on everything from homes to furniture.
At the same time, supplies have been limited since factories closed to contain the spread of the coronavirus, and delivery routes have struggled to respond to rapidly changing consumption patterns. The combination has driven prices up in many places. In the United States, inflation was 4.4 percent during the year through September.
The UK’s annual inflation rate stood at 3.1 percent in September and is expected to peak above 4 percent in the coming months. Supply problems were exacerbated by Brexit, which raised trade barriers and encouraged European Union workers to leave the country during the pandemic. And in the eurozone, inflation in October was 4.1 percent, which corresponds to the highest inflation rate for the bloc.
The Bank of England could become the first major central bank to raise interest rates if it meets investors’ expectations on Thursday. Andrew Bailey, a senior central bank official, said inflation is worrying and that policymakers need to prevent high inflation from becoming persistent, but Thursday’s decision is likely to split the nine-member monetary policy committee as some members they didn’t. expressed confidence in the need to raise rates.
The way forward for the European Central Bank is not so obvious. The bank’s president, Christine Lagarde, said last week that higher inflation and supply chain bottlenecks will last longer than expected in the region, but will eventually subside throughout 2022. The financial markets were wrong in anticipating the next interest rate hike. per year, she added, because long-term inflation expectations remain below the ECB’s target.
European politicians have taken a small step to prepare for the end of the emergency levels of support. Last month, they slowed down their bond buying program during the pandemic, attributing the change to improved economic outlook and higher inflationary expectations.
Other central banks have been more outspoken in their concerns. The Bank of Canada abruptly ended its bond buying program last week and indicated it could raise interest rates earlier than expected as the forces pushing prices upward were stronger and more persistent than expected.
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Norway’s central bank has already raised interest rates and is expected to raise them again in December. The Reserve Bank of Australia announced this week that it is completing its rate cap program on certain types of debt, citing “earlier than expected progress” in meeting its inflation target.
US policymakers are preparing to scale back their own bond buying program, in part because it will make their policies more flexible: officials still expect inflation to fall substantially over time. If it doesn’t, some politicians want to end bond purchases and be able to raise interest rates to counter skyrocketing prices.
The inflationary moment faced by global central banks came as a surprise. Many have spent years fighting moderate inflation trying to figure out how to bring price increases back to levels that lay the foundation for a vibrant economy. This situation has changed quickly – many still expect the surge in price pressures of the pandemic to disappear, but how quickly and how fully this will happen is perhaps the biggest question in the global economy.
“It is now clear that the risks lie in longer and more persistent bottlenecks and therefore higher inflation,” Fed Chairman Jerome H. Powell said recently, adding that the Fed “is in the business of managing risk, not with absolute certainty. … … “