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Analysis: Central banks will happily ignore inflation-mongers

Analysis: Central banks will happily ignore inflation-mongers

The world’s biggest central banks will happily live with higher inflation and investors now aggressively betting on a quicker end to monetary stimulus are all but certain to be proved wrong.

 

After a decade of underestimating inflation, central bankers in the United States, Europe and Japan have every reason keep money taps open and policymakers are even rewriting their own rules so they can let price growth overshoot their targets. If anything, central banks are more likely to nudge up stimulus, particularly in the euro zone, keeping borrowing costs depressed and ignoring the inflation hawks at least until growth is back to pre-pandemic levels -- and not just fleetingly.

 

The Reserve Bank of Australia already launched a surprise bond buying operation while the European Central Bank has repeatedly warned investors not to push yields too high, unless they want to fight its 1 trillion euro war chest. The argument behind the inflation warning is that once economies reopen, massive government stimulus will combine with pent up consumer demand, unleashing spending-fuelled price pressures unseen for decades. Although top economists are weighing in on both sides of the debate, the voices that really count all seem to be downplaying the threat.

 

“Inflation dynamics do change over time but they don’t change on a dime,” Federal Reserve Chair Jerome Powell said. “We don’t really see how a burst of fiscal support or spending ... that doesn’t last for many years, would actually change those inflation dynamics.”

 

Even if inflation accelerates, a big if given that big central banks are all undershooting their 2% goal, tightening policy too hastily is seen as a bigger evil than moving too slowly. First off, much of the inflation rise is temporary, driven by the rebound in oil, one-off stimulus measures and the base effect of tanking prices a year ago. So this is not the sort of sustained inflation policymakers are looking for.

 

Tighter policy could also choke off growth - a costly blunder with tens of millions still out of work after the biggest peacetime economic crisis in a century. In the worst case, higher borrowing costs would even raise debt sustainability concerns, particularly in heavily indebted southern Europe and across emerging markets.

 

And lastly, the Fed and European Central Bank both tightened policy too quickly in the past decade, forcing them into the type of credibility-damaging reversal they are now keen to avoid.

 

Source: Reuters

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