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 has not lost significant momentum — yet.
Policymakers 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 on Nov 30 that the Fed 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 realisation much quicker. The Reserve Bank of New Zealand (RBNZ) and the Bank of Korea both raised rates twice in the past few months and signalled there is 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 sceptical 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: “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 added: “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 (BOE), hammered last month for blinking after foreshadowing a hike, is still wrestling with its stance. The same day Powell buried “transitory”, a respected BOE policymaker 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, member of the Monetary Policy Committee Catherine Mann said.
Even for those central banks that have slow-walked the dismantling of stimulus, it is notable that few are talking about additional easing. For much of the past 18 months, the potential costs of moving too slowly, either to tighten or ease, were tolerable. But inflation is no longer quiescent. The ability of central banks to buttress expansion without spiking prices is diminished. The Fed’s preferred measure, for example, has been above its 2% target since March and accelerated to 5% in October.
Omicron raises questions about the strength of demand in the event lockdowns are renewed and people have to wait for a whole new vaccine rollout before daring to dream of normal. Still, there are fewer question marks about its impact on inflation. Supply chain issues that have contributed to elevated prices are not dissipating overnight. Omicron may aggravate them.
The policy landscape may become clearer over three days in the middle of this month. Officials at the Fed, BOE, European Central Bank and Bank of Japan set rates on Dec 15- 17. That’s about the timeline public health experts are offering to assess omicron. For interest rates, do not count on the variant being a complete game-changer. Policy is travelling in only one direction, albeit at different paces.
There may be no prizes for moving first on interest rates. It does look like there won’t be punishment. — Bloomberg Opinion