A generationTwo camps can be distinguished in the way the central bank responds to the current rise in inflation.Major central banks are often led by the United States U.S. Federal Reserve Assuming that the inflation rate will fall again starting next year, monetary policy will still be required not to ignore economic stimulus. However, in some small countries, central banks are fighting inflation by raising key interest rates.
In the comments, the Federal Reserve announced that it would gradually reduce bond purchases as a sign of a major shift to tightening monetary policy. It’s not like this. During periods of good economic activity, bond purchases have almost no impact, but in the foreseeable future, it is expected that there will be no interest rate hikes in the United States that are more likely to have an impact. As has happened many times in the past, the Fed clearly believes that the development of the labor market is more important than the possible risk of inflation, and it is more willing to belittle the latter. Given the steady economic growth and a good inflation rate of 5%, the US monetary policy is still expansionary. The reaction of the financial market also shows this; stock prices rise, bond yields fall.
In the procrastinator camp, Bank of England queue. In her communication, she had prepared for the financial market to raise the key interest rate this week, but then she was afraid of her courage and decided not to take this step. This led to a sharp drop in the yield of British bonds in the bond market.
The European Central Bank can follow the Fed to buy bonds
Compared with his colleagues in Washington and London, the ECB president has tightened monetary policy much more slowly. Christina Lagarde Although there is no understandable reason to continue to insist on negative deposit rates, the whole year of next year will not include a key interest rate hike. Here, bond yields have also fallen.
this EZB The next few months may reduce bond purchases like the Fed, because the pandemic-related purchase plan may expire in the spring of 2022. However, within the framework of its plan formulated in 2015 and still in operation, the European Central Bank will retain sufficient flexibility to purchase bonds in the future. The currency exchange rates of countries such as Switzerland and Denmark against the euro are very important to their monetary policy, and they will join the European Central Bank’s snail pace.
Central banks in other countries are more active in responding to the danger of inflation and are hesitant with large companies. Major interest rates in countries such as New Zealand, Poland and the Czech Republic have risen. The Bank of Australia does not want to raise the key interest rate for the time being, but will not control government bond yields in the future.
Will there be a wage-price spiral?
Who is right-an indecisive adult or a hurried villain? The answer to the question should be in 2022, when it can be foreseen whether the current high inflation rate will remain short-lived, or whether significant wage growth will lead to a spiral increase in wages and prices. It is not clear which situation is more likely to happen.
It is undeniable that monetary policy cannot directly offset the current shortage of raw materials and other commodities, mainly due to the adverse effects of globalization. No central bank can influence the supply status of a single commodity market; it will not have any authorization for this.
However, the central bank can well prevent the fact that once the supply shortage ends, an excessive increase in aggregate demand will cause the price level to rise sharply. Although experience has shown that raising the key interest rate is more effective than reducing bond purchases, it has the authority and the necessary tools to do so. The hesitation of the big players coincides with the majority opinion in the financial market, and they also regard inflation as a temporary phenomenon. However, in turbulent times, people should not trust long-term expectations too much. The danger of inflation should not be taken lightly.
