The Banking Executive Magazine - January 2022 Issue

Central Banks PREPARE FOR BIG CENTRAL BANKS MOVING OUT OF STEP The world's biggest central banks, moving in tandem at the height of the pandemic, are set to tighten pol- icy at vastly different speeds, likely increasing economic and market volatility this year, top policymakers said on Friday. Central banks unleashed unprece- dented stimulus in recent years to prop up growth but excessive cash has now pushed inflation to multi- decade highs around much of the world, raising fears that policymakers are falling behind the curve. The U.S. Federal Reserve is likely to lead the way, hiking rates possibly as soon as next week, while the Bank of Japan, sitting at the other end of the spectrum, is likely to keep policy ex- ceptionally loose for years to come. “The issue here is that what the Fed does, has implications for the U.S., it has implications for other countries, especially those that have high levels of dollar denominated debt," IMF Managing Director Kristalina Georgieva said. "That could throw cold water on what for some countries is already a weak recovery," she told a World Economic Forum panel, adding that countries with high dollar debt should refinance now. Indeed, expectations for quicker Fed action have already pushed up bor- rowing costs across the world and the yield for 10-year German bonds briefly moved into positive territory this week for the first since early 2019. Georgieva said containing the pan- demic and boosting vaccination rates was imperative to address the widen- ing gap between rich and poor coun- tries, and to secure future growth for all. "The world must spend the bil- lions necessary to contain COVID in order to gain trillions in output," she said. The problem with inflation is that its rates now vastly differ around the world, leading to varying degree of social and political tension as the price of everyday consumer goods from food to fuels, soar. U.S. inflation is now at 7.0%, the highest rate since 1982, and looks to be stubborn, leading to policymakers there giving up on the idea that the spike is transitory. Meanwhile, in the euro zone, price growth is at 5.0% but seen back below 2% by the end of the year while in Japan, the rate is just 0.6%. VARYING SPEEDS The big difference is that the U.S. re- covery is well advanced, leading to the sort of wage surge and labour market stress others are not yet expe- riencing. "When I look at the labour market, we are not experiencing anything like the great resignation and our em- ployment participation numbers are getting close to the pre-pandemic level," European Central Bank Presi- dent Christine Lagarde told the on- line panel. "If only those two factors, if you look at them carefully, are clearly indicat- ing that we are not moving at the same speed and we are unlikely to experience the same kind of inflation increases that the U.S. market has faced," she added. Still, the ECB has also started moving away from its exceptionally easy pol- icy and plans to continue cutting asset purchases throughout the year, Lagarde added. Meanwhile Bank of Japan Governor Haruhiko Kuroda said his bank is not even contemplating a move in that direction just yet. "We're not afraid of inflation because inflation (in Japan) is so low," Kuroda said. “Unlike in the U.S. or Europe, we have to continue our extremely accommodative, easy monetary pol- icy for the time being." the BANKING EXECUTIVE 48 ISSUE 157 JANUARY 2022