What once looked overzealous now appears prudent. Central banks that moved early to pare back stimulus and hike interest rates may have made the right call after all. While we wait for scientists and medical authorities to gauge how big a risk Covid-19’s omicron variant poses to public health, inflation is a sure thing. The global recovery hasn’t lost significant momentum — yet.
Policy makers need to respond to what's in front of them. Sure, they could wait. And wait. But the pandemic never offered simple choices. This helps explain why Federal Reserve Chair Jerome Powell’s remarks Tuesday that the central bank may speed up its taper of asset purchases came as such a shock. After months of trying to convince markets that this bout of high inflation would pass, he gave up on the word “transitory” altogether. There may not be clarity on omicron, but there is now conviction — arguably for the first time in decades — that inflation needs to be tackled.
Others came to this realization much quicker. The Reserve Bank of New Zealand and the Bank of Korea both raised rates twice in the past few months and signaled there’s more to come. The Monetary Authority of Singapore has tightened policy and the Reserve Bank of India suspended its own version of quantitative easing.
At the time, I was skeptical about some of these moves. The RBNZ has a history of moving aggressively, only to quickly reverse course. I have since come to appreciate its reasoning. The bank's chief economist, Yuong Ha, laid out the case for risk management in an interview Tuesday with Bloomberg News’s Matthew Brockett: “From where we sit, the outlook is demand might be a bit weaker, it might be a bit stronger depending on how households behave in this new world,” Ha said. “But it is still a world where inflation pressures are rising, capacity pressures are going to stick around for a while and hence you probably need to be removing monetary stimulus rather than maintaining it.”
As reasonable as this sounds, not everyone’s thinking is as evolved. The Bank of England, hammered last month for blinking after foreshadowing a hike, is still wrestling with its stance. The same day Powell buried “transitory,” a respected BOE policy maker was reluctant to rush to judgment. “There’s still a lot of information to come in, especially with regard to omicron, so it is premature to even talk about timing, much less how much” when thinking about rate hikes, Catherine Mann told a web audience at an event hosted by Barclays Plc.
