The end of super cheap money? Central banks begin tightening cycle
These guardians of monetary policy are generally satisfied that the economic recovery has turned out to be stronger than they feared at the start of the year. But they are starting to fear that money will get too cheap for too long. It would threaten rising inflation, excessive borrowing and even financial instability as the world emerges from the coronavirus crisis. Central bankers are no longer looking to do everything in their power to ensure that households, businesses and governments have the money to borrow at exceptionally favorable rates. Along with Norway’s monetary tightening, the first in any advanced economy since the start of the pandemic, four central banks in emerging economies – Pakistan, Hungary, Paraguay and Brazil – also increased the cost of borrowing this week, while that the US Federal Reserve and the Bank of England have both signaled a move towards tighter monetary policy.
Oystein Olsen, Governor of the Central Bank of Norway: “A normalizing economy now suggests that it is appropriate to start a gradual normalization of the key rate” © Odin Jaeger / Bloomberg
“A normalizing economy now suggests that it is appropriate to start a gradual normalization of the policy rate,” Oystein Olsen, the governor of Norges Bank, said, explaining the bank’s decision. Noting that raising interest rates from a 0% floor to 0.25% was probably not the last, he added that as inflation approached its target of 2%, a gradual program of interest rate hikes would make it possible to counter the appearance of financial imbalances. such as high household debt and house prices.
To varying degrees, Norway’s economic trends match those of advanced economies. Strong forecasts from the OECD have shown that G20 countries continue to recover to the point that they expect they will return to production and employment levels, expected before the pandemic, by the end of 2022.
Compared with the aftermath of the 2008-2009 financial crisis, when advanced economies were never close to removing the damage from the recession, the OECD forecast would be a remarkable achievement.
But such is the level of ambition this time around compared to a decade ago that forecasts have still not satisfied OECD chief economist Laurence Boone. Many economies had high unemployment rates before the pandemic, she says, especially in Europe, so they could “do better”. It is not enough, she adds, to simply bring savings “where they were before but with more debt”.
Persistent price increases
Shipping costs have almost quintupled since the start of 2019 with less dramatic but equally unusual increases in commodity and food prices. A global semiconductor shortage has delayed shipments of goods and prevented manufacturers from meeting consumer demand, especially in the automotive sector. With supply chain bottlenecks and Covid-19 outbreaks disrupting the flow of goods, prices have started to rise, further adding to the dismal prospect of a period of slower growth.
Such high ambition for the global economy as well as the disruption of normal consumption patterns during the pandemic have generated multiple challenges that can no longer be ignored.
“This is already quite a change from the pro-growth / commodity reflation investment mentality seen a few months ago,” Citi’s team of global economists wrote this week.
High demand: Container ships are anchored in the ports of Long Beach and Los Angeles this week awaiting unloading © Mario Tama / Getty Images
A world of stubbornly persistent price hikes and unpredictable recovery shocks is difficult for central banks to manage. Their standard mode of operation is to assume that they have as good an understanding as possible of employment levels and the production of goods and services, and then aim to manage spending levels accordingly so that inflation remains. low and stable, normally targeting a rate of 2%. .
In the recovery from Covid-19, with rising energy prices and supply shortages becoming acute, it is much more difficult to get a sense of what is possible and the likely level of spending required in the areas. economies where the coronavirus is still present. Central banks must therefore set interest rates while guessing at both the level of supply and demand.
Fed Chairman Jay Powell continued his plans to cut the $ 120 billion-per-month asset purchase program that the central bank had pledged to maintain until it registers substantial progress on average inflation of 2% and maximum employment © Eric Baradat / AFP via Getty Images
This week, growing evidence of labor shortages and the apparent pick-up in spending has resulted in a tendency to be more aggressive with interest rates. The US Federal Reserve’s monetary policy meeting on Wednesday was the most explicit acknowledgment to date that it is preparing to reduce the emergency support put in place at the start of the pandemic to avoid a much deeper contraction.
His remarks are accompanied by a new set of individual projections on the future development of US interest rates, which have shown that a growing number of officials are considering a rate hike next year. The committee is also split on a 2022 adjustment, according to projections, with at least three rate hikes now scheduled by the end of 2023.
Jay Powell, the chairman of the Fed, continued his plans to reduce the $ 120 billion per month asset purchase program that the central bank had pledged to maintain until it finds out. ” further substantial progress “on the dual objective of average inflation of 2% and maximum employment. He made an announcement at the next meeting in November to officially launch the “tapering off” process that would gradually reduce buying, and said the Federal Open Market Committee supported the complete removal of the stimulus by the end of the year. half time. 2022.
“The decided that because inflation seems more persistent and the risks of it spilling over to expectations and a wage-price spiral are higher, they should a little faster… Backing down on accommodations. Said Donald Kohn, former vice chairman of the Fed now at the Brookings Institution.
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