Central Banks Are Dialing Back Their Pandemic-era Support

The Federal Reserve, the Bank of England and the Reserve Bank of Australia are among several central banks pulling back support as inflation jumps.

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Central banks around the world are dialing back their pandemic-era support.

Andrew Bailey, the governor of the Bank of England, has said policymakers need to prevent high inflation from becoming permanent.Credit…Stefan Rousseau/Pool via REUTERS

Nov. 3, 2021, 9:49 a.m. ET

Tangled supply chains, rising costs for raw goods and soaring consumer demand have combined to push prices rapidly higher in many wealthy countries, prodding central banks around the world to start dialing back some of the extraordinary economic support measures they put in place during the pandemic.

In the United States, the Federal Reserve is expected to on Wednesday announce a plan to slow its large-scale asset purchases, a process its officials want to complete before lifting interest rates down the line. Increasingly, markets expect the Fed to start to lift interest rates from near-zero in the second half of 2022.

The Bank of England is even further along: Investors expect it could raise its main interest rate as soon as Thursday. And in Canada, Australia, Norway and elsewhere, monetary authorities have also begun dial back support or lay the groundwork for a step away from policy help.

The shift away from full-blast economic stimulus comes amid a burst in inflation that has no 21st century precedent. Price gains had been chronically weak for decades, but this year, they have rocketed above the 2 percent rate that most advanced economy central banks target, partly as government relief helped families to spend on everything from houses to furniture.

At the same time, supply has been limited after factories shut down to contain the spread of the coronavirus and shipping routes struggled to respond to rapidly changing consumption patterns. The combination has caused prices to move higher in many places. In the United States, inflation came in at 4.4 percent in the year through September.

Britain’s annual rate of inflation was 3.1 percent in September, and is expected to peak above 4 percent in the coming months. Supply bottlenecks have been exacerbated by Brexit, which has raised trade barriers and contributed to European Union workers leaving the country throughout the pandemic. And in the eurozone, inflation came in at 4.1 percent in October, matching the highest-ever rate of inflation for the bloc.

The Bank of England might become the first major central bank to raise interest rates if it meets investor expectations on Thursday. Andrew Bailey, the central bank’s top official, said the rate of inflation was concerning and that policymakers needed to prevent high inflation from becoming permanent, but the decision on Thursday is likely to split the nine-person monetary policy committee as some members haven’t expressed as much certainty that rates need to rise.

The path forward for the European Central Bank isn’t as clear cut. Last week, Christine Lagarde, the president of the bank, said higher inflation and supply chain bottlenecks would last longer than expected in the region, but would eventually ease over the course of 2022. Financial markets were wrong to expect an increase in interest rates next year, she added, because longer-term inflation expectations remain below the E.C.B.’s target.

European policymakers have taken a small step to prepare for the end of emergency-levels of support. Last month, they slowed their pandemic-era bond buying program, attributing the change to an improved outlook for the economy and higher inflation expectations.

Other central banks have been more blunt about their concerns. The Bank of Canada abruptly ended its bond-buying program last week and signaled that it could raise interest rates sooner than expected, as the forces pushing prices higher proved to be stronger and more persistent than anticipated.

Understand the Supply Chain Crisis

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Covid’s impact on the supply chain continues. The pandemic has disrupted nearly every aspect of the global supply chain and made all kinds of products harder to find. In turn, scarcity has caused the prices of many things to go higher as inflation remains stubbornly high.

Almost anything manufactured is in short supply. That includes everything from toilet paper to new cars. The disruptions go back to the beginning of the pandemic, when factories in Asia and Europe were forced to shut down and shipping companies cut their schedules.

First, demand for home goods spiked. Money that Americans once spent on experiences were redirected to things for their homes. The surge clogged the system for transporting goods to the factories that needed them — like computer chips — and finished products piled up because of a shortage of shipping containers.

Now, ports are struggling to keep up. In North America and Europe, where containers are arriving, the heavy influx of ships is overwhelming ports. With warehouses full, containers are piling up at ports. The chaos in global shipping is likely to persist as a result of the massive traffic jam.

No one really knows when the crisis will end. Shortages and delays are likely to affect this year’s Christmas and holiday shopping season, but what happens after that is unclear. Jerome Powell, the Federal Reserve chair, said he expects supply chain problems to persist “likely well into next year.”

Norway’s central bank has already lifted interest rates and is expected to raise them again in December. The Reserve Bank of Australia announced this week that it was ending its program to cap rates on certain types of debt, citing “earlier than expected progress” toward its inflation target.

U.S. policymakers are preparing to dial back their own bond-buying program in part because doing so will leave their policy in a more nimble position: Officials still expect inflation to fade substantially with time. If it does not, some policymakers want to be done with the bond purchases and in a position to raise interest rates to counteract heady price gains.

The inflationary moment confronting global central banks comes as a surprise. Many had spent years battling tepid inflation, trying to figure out how to coax price gains back to the levels that lay the groundwork for dynamic economies. That situation has rapidly reversed — many still expect the burst of pandemic price pressure to fade, but how quickly and how completely that will happen is perhaps the biggest question in global economics.

“The risks are clearly, now, to longer and more persistent bottlenecks and thus to higher inflation,” Jerome H. Powell, the Fed chair, said recently, adding that the Fed was “in a risk management business, not one of absolute certainty.”

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