Fed, ECB and BOE board ‘transitory’ inflation express

By Dan Burns and Howard Schneider

Reuters the edge of the repair.

On Thursday, the Bank of England joined with the Federal Reserve and the European Central Bank in pairing an accommodative policy with an expected easing of bottlenecks over the coming months – and easing inflationary pressures these bottlenecks caused.

The BoE kept its key rate stable on Wednesday https://www.reuters.com/world/uk/bank-england-wrong-foots-markets-keeps-rates-hold-2021-11-04 despite general expectations to become the first major central bank to raise interest rates as a sign of assent to the high rate of price hikes that have taken hold this year.

Inflation “is expected to subside over time, as supply disruptions subside, global demand rebalances and energy prices stop rising,” with a likely peak in April next year, the BoE said in an announcement pledging to monitor “medium-term inflation prospects” and ignore “factors that may be transitory.”

This echoed the Fed’s use of the word “transient” https://www.reuters.com/business/with-bond-buying-taper-bag-fed-turns-wary-eye-inflation-2021-11 -03 to describe the current inflation episode and the ECB’s expectations that price increases will be “moderate” over the medium term. In a statement this week, ECB President Christine Lagarde explicitly said, amid market betting, that the European bank was unlikely to raise interest rates in 2022.

It is a re-commitment, in a sense, to one of the fundamental objectives of monetary policy since the onset of the pandemic: to keep borrowing costs low enough to allow households and national economies to come out of debt. the health crisis, a target still not met given ongoing infections, missing jobs and uncertainty as to when workers could return more fully.

But it also now creates a common prospect – and a common set of risks – for the central banks that control three of the world’s major reserve currencies, and that many believed were about to go into inflation-fighting mode.

Instead, they are banking on solving problems beyond their control, from port backlogs to the spread of the virus in manufacturing centers or the willingness of U.S. residents to fill near-record job openings.

“Our tools cannot ease supply constraints,” Powell said at a press conference Wednesday after the release of the Fed’s latest policy statement. But, in a perspective now shared among the main developed countries, “we continue to believe that our dynamic economy will adapt to supply and demand imbalances and that, in doing so, inflation will drop to much higher levels. close to our 2% longer term target. . “

The question is whether the supply improvements are happening fast enough that Powell and his colleagues don’t feel the need to intervene by dampening demand with higher interest rates, a step they all agree to take. the moment is premature but depends on a slowdown in inflation over the next few months. .


Some smaller central banks have already moved towards an exit from pandemic policies.

The Bank of Canada a week ago surprised markets with hawkish signals on its outlook, then this week the Reserve Bank of Australia suggested interest rate hikes were underway, even though the RBA took a more cautious approach on timing.

This has led to a wave of expectations that major monetary policy players will speed up their own rate hike schedules. Rate futures and bond markets on both sides of the Atlantic had revised their prices for a previous Fed and ECB rate hike over the past month amid a threatening inflationary environment. more rigid than transient.

The prices around the Fed hikes have already eased. Yields on 2-year Treasuries fell about 5 basis points on Thursday, the biggest drop in nine months and a proxy for Fed policy expectations – falling even as the US central bank announced that it would cut its monthly $ 120 billion bond buying program by $ 15. billion per month.

“If there is one mistake, it’s how the markets interpret the reaction function of these banks,” said Ed Al-Hussainy, senior rate analyst for Columbia Threadneedle Investments. All agree on the likely turn of inflation next year, and in the case of the Fed, it is committed to a return to “maximum employment”, a target it has not. not fully defined but which Powell pointed out on Wednesday had not been reached.

“They never had maximum employment criteria for ‘take-off.’ It’s a crazy experience and it’s just beginning. Why bypass it now?” Said the analyst.

(Additional reporting by Howard Schneider in Washington, Balazs Koranyi in Frankfurt and William Schomberg in London, edited by Shri Navaratnam and Paul Simao)

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