Central banks in advanced economies shift monetary policy stance

2022-04-23 0 By

Entering February, central banks of the world’s major economies frequently displayed a hawkish stance of “fighting inflation to the end”, gradually reversing the loose monetary policy stance since the outbreak of COVID-19.But there seems to be more economic and political inconveniences and trade-offs behind the hawkish stance of major central banks facing the twin tasks of stabilising employment and inflation.High inflation amid a recovering economy is undoubtedly key to the Fed’s policy shift.The US consumer price index rose 7.5 per cent in January from a year earlier, the highest in nearly 40 years, not only because of energy prices but also because of problems in the domestic Labour market.Thanks to massive financial subsidies, the LABOR force participation rate in the US continues to fall below pre-PANDEMIC levels, resulting in a labor shortage that remains historically high.While January data showed an improvement in the labor force participation rate, the continued stronger-than-expected rebound in wages suggests a tight labor market continues.Therefore, it is not certain when the inflation problem caused by tight labor force will ease, but the inflationary pressure will certainly still exist, which is one of the important factors forcing the Federal Reserve to tighten monetary policy to deal with the inflation problem.In addition, although economic growth is facing some downward pressure, the US economy is still recovering is an important reason for the Fed to dare to tighten.The latest figures show us gross domestic product rose 6.9 per cent on an annualised basis in the fourth quarter and 5.7 per cent from a year earlier, helped by restocking.While domestic consumption is recovering, household spending is shifting from goods to services.January non-farm payrolls came in at a better-than-expected 467k.Under the above macro situation and the continuous rising inflation pressure, the Federal Reserve’s recent attitude has obviously turned “eagle”, and the chairman of the Federal Reserve Powell’s recent series of speeches seem to have “penitence” for the previous “temporary” judgment of inflation.Investors generally believe that the Fed will raise interest rates five times this year, and some even believe that the Fed could raise interest rates seven times in 2022, with further increases in 2023 and 2024, gradually raising the target rate from zero to around 2.5%.The Fed’s hawkishness is echoed by the Bank of England.At its February meeting, the Bank of England’s Monetary Policy Committee decided to raise the base rate by a quarter of a percentage point to 0.5%.It is worth noting that while the nine members voted 5-4, the minority was not doves but more aggressive hawks who wanted a one-off 50 basis point rise.The MPC also agreed to stop reinvesting its holdings of Gilts and corporate bonds to maturity, and said it would fully liquidate its holdings of investment grade non-financial institution bonds by the end of 2023, effectively beginning the process of shrinking the UK’s balance sheet.The bank of England’s decision is also a macroeconomic trade-off against persistent inflation.The Bank of England believes that the economic impact of the omicron mutant spread in December and January is being phased out;UK GDP is likely to recover gradually in February and March, with output returning to pre-pandemic levels by the end of the first quarter.But the Bank of England warned that the outlook for the British economy was not limitless and that further increases in global energy prices and the price of traded goods would cause inflation to breach 7 percent soon, well above its 2 percent medium-term target.High inflation will also exert significant pressure on real income levels and consumption.In the context of some repair to economic fundamentals and continued inflationary pressures, the Bank of England took a hawkish approach while “explaining” the efficiency of monetary policy, stressing that rapid increases in energy prices and the prices of traded goods were exogenous variables that monetary policy could not avoid.The extent of future monetary tightening will depend on medium-term inflation expectations;While economic fundamentals remain stable, the Bank of England is likely to tighten monetary policy further.Markets expect the bank of England to keep raising rates at its March and May meetings, but it will take two years for CPI to effectively fall back above 2% and around three years for CPI to fall back below target.If the British and British central banks face a balance between stable growth and stable inflation, the European Central Bank faces difficult choices and trade-offs.Euro-area GDP grew by 0.3% in the fourth quarter compared with the same period last year.While output has returned to pre-pandemic levels and unemployment fell to a historic low of 7 per cent in December, the overall picture is weaker than expected and there is downward pressure on first-quarter growth prospects.The ECB believes output in the eurozone will contract in the first quarter due to the spread of the omicron mutant strain and the surge in cases. Although some countries have started to relax control measures, recent data suggest that growth momentum in sectors that are more sensitive to COVID-19 has weakened, and the service PMI level continued to fall in January.The composite PMI fell to 52.3, the lowest since 2021, from 53.3 at the end of last year.Meanwhile, supply-chain constraints and high energy prices continue to hit the eurozone economy, with inflation rising to 5.1 per cent in January from 5 per cent in December.Therefore, although the European Central Bank announced unchanged benchmark interest rates at its February 3 meeting, it is also gradually turning hawkish and will end asset purchases under the framework of the emergency Anti-epidemic Bond Purchase Program (PEPP) at the end of March this year.”Inflation is likely to remain elevated for a longer period than expected, despite uncertainties about the outlook,” ECB President Christine Lagarde said after the meeting.The ECB stands ready to adjust its policy tools to ensure stable inflation over the medium term.Market institutions believe the ECB will start raising rates after its current asset purchase programme ends and expect it could announce important policy changes at its March meeting.In addition to the macro economy, the livelihood and political nature of inflation in developed economies are more prominent.International Monetary Fund Managing Director Kristina Georgieva also said recently that “inflation is a more serious economic and social problem than expected”.Tackling inflation has become not just a macroeconomic issue, but also a social and political one.Some believe the current global environment of chronically low inflation is changing.High prices in the upstream industry are gradually being transmitted downstream, and people’s lives are obviously affected and impacted, which forces central banks to tighten monetary policy.Central banks in advanced economies balance growth with the economic and political implications of keeping inflation in check.Based on this, some market institutions believe that the central bank’s voice and expectations may differ from the final outcome.Although Powell will raise interest rates tone from the “progressive” into a “flexible”, although part of the bank of England monetary policy committee member requires a larger increases in interest rates, but to maintain balance between stable inflation and a stable growth remains a top priority of all countries, camera adjustment will be the future of the developed economies, the central bank decisions advocate tone,There is a high probability that interest rate hikes and balance sheet shrinkage will not be too aggressive.At the same time, overall interest rates in advanced economies will remain low in the near term, with major economies remaining below historical norms over the medium term.(Economic Daily By Jiang Huadong)