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Central banks face tough decisions after Russia’s invasion. Not everyone’s sure they’ll get it right

KEY POINTS
  • Central banks the world over have been caught cold by a surge in inflation in the aftermath of the coronavirus pandemic, which has sent annual consumer price increases to multi-decade highs.
  • The risk, economists have suggested, is that by tightening policy aggressively even as growth is threatened by the conflict while financial conditions and the labor market tighten, central banks could trigger a recession.

LONDON – Just as many central banks had set their sights on normalizing monetary policy as economies emerged from the coronavirus pandemic, Russia’s invasion of Ukraine threw them another curveball.

The U.S. Federal Reserve last week approved its first interest rate hike in more than three years and penciled in further increases at each of its six remaining policy meetings this year, as it looks to rein in soaring inflation.

The Bank of England imposed its third consecutive rate hike but struck a relatively dovish tone, with the Russia-Ukraine conflict and its upward pressure on energy prices expected to keep inflation higher for longer.

European Central Bank President Christine Lagarde said last week that policymakers have “extra space” between the planned end of the ECB’s quantitative easing program this summer and a first hike to the cost of borrowing in more than a decade. The ECB earlier this month surprised markets by announcing it would end its asset purchase program in the third quarter of 2022.

So, while the Bank of England offered a slightly dovish surprise after its more hawkish start out of the blocks, the Fed and the ECB both surprised on the hawkish side, evidencing the balancing act facing policymakers.

Central banks the world over have been caught cold by a surge in inflation in the aftermath of the pandemic, which has sent annual consumer price increases to multi-decade – and in some cases, record – highs.

Yet to ‘walk the walk’

The risk, economists have suggested, is that by tightening policy aggressively even as growth is threatened by the conflict and financial conditions and the labor market tighten, central banks could inadvertently trigger “stagflation” — a period of high inflation, low growth and high unemployment.

However, most seem to have prioritized reining in inflation over concerns about economic growth and have remained undeterred so far by the potential impacts of the war.

Hugh Gimber, global market strategist at JPMorgan Asset Management, said Thursday that the latest round of central bank meetings showed policymakers are feeling “uncomfortably behind the curve” and are eager to normalize policy.

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