WASHINGTON/FRANKFURT – The Russian military operation in Ukraine may slow global growth and raise new economic risks, but top central banks are keeping their focus trained on an inflation fight that looks set to intensify.
Europe may be the most vulnerable to a broader economic shock from the war, but the European Central Bank made clear that the region could absorb the expected hit to economic growth but couldn’t afford for policymakers to turn their backs on rising prices at a record rate across the euro zone.
The ECB, calling the war a “watershed moment,” in a surprise move sped the end of one of its key pandemic bond purchase programmes and cleared the way for possible interest rate increases later this year.
ECB President Christine Lagarde in a press conference said the economy could weather the shock from war and tighter policy and “still grow robustly in 2022…Supply disruptions show some signs of easing. The impact of the massive energy price shock on people may be partly cushioned by drawing on savings accumulated during the pandemic.”
“You can slice inflation any way you want and look at any core measure, it’s above target and rising. We have a 2% mandate and we’re failing it,” said one ECB policymaker, who asked not to be named.
A similar narrative was emerging in the United States and elsewhere as officials weighed the economic risks suddenly facing the world against the unexpectedly large and persistent rise in inflation seen as major economies reopened from the pandemic.
Russia’s Feb. 24 invasion of Ukraine has prompted a sell-off in global equity markets, increased some measures of financial market stress, and most notably pushed up the price of oil.
But none of that has pointed to a systemic problem, at least not yet. The Fed and other central bank officials have said they are confident that adequate market backstops are in place; the stress metrics have not increased that much in comparison to prior financial shocks; and the price of oil has moderated, with West Texas Intermediate crude trading Thursday afternoon for about $107 a barrel, down from as much as $130 earlier this week.
More central to policymakers is that in major parts of the world economic growth is expected to continue above trend, allowing them to focus on inflation running far faster than their common 2% percent benchmark.
The Bank of Canada raised interest rates earlier this month. The Bank of England and the Fed are expected to do so next week. Each is expected to follow with more increases in coming months.
Even fiscal policy officials – more sensitive to the politics of economic developments and often cheerleaders of looser central bank policies – are keenly aware of the corrosive power of run-away price increases.
Inflation “is of tremendous concern,” Treasury Secretary Janet Yellen said in a Washington Post Live interview according to Reuters. “It hits Americans hard. It makes them worry about basic pocketbook issues.”
New US data released recently showed consumer prices rose at a 7.9% annual rate in February, the highest in 40 years. Investors now expect the Fed to raise the target federal funds rate to a level between 1.75% and 2% by year’s end, a quarter point higher than they expected as of last week.
The outlier among major central banks is the Bank of Japan. The war is expected to boost inflation pressures there as well. But the recovery from the pandemic is less advanced, and policy tightening not imminent.
