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Earlier this year one of the biggest risks for the global economy was the appearance of new variants of coronavirus. Today, in turn, markets are mainly scared of inflationary pressures that are exacerbated by the energy crisis, bottlenecks and the labor shortage that affects companies throughout the developed world.
According to the International Monetary Fund, current acceleration in inflation may be “less transitory,” which would cause a dilemma among central banks. In other words, if situation doesn’t improve in the next few months, financial regulators will be forced to take actions. In fact, according to the last FOMC meeting minutes, tapering could begin in mid-November or December of this year and end in mid-2022. It is expected that the Fed will begin the reverse policy of quantitative easing by cutting $10 billion a month in Treasuries purchases and $5 billion a month in mortgage-backed securities. It should be mentioned that the entity is currently buying US Treasury securities and mortgage bonds worth 120,000 million dollars a month. Only after the end of the stimulus withdrawal process, as well as the full employment and 2% core inflation targets, could the central bank consider raising interest rates.
For now, however, members of the Fed remain divided on how threatening inflation poses and how quickly they might have to raise interest rates. To be more precise, some think that economic conditions justify keeping the federal funds rate “at or near its lower limit for the next couple of years, while others believe that labor market conditions and inflation will allow The Fed will start raising rates late next year.
In England, on the other hand, BOE Chairman Andrew Bailey sent a fresh signal on Sunday that the regulator is preparing to raise interest rates as inflation risks mount. Bailey said he continues to believe that the recent jump in inflation is temporary, but that a rise in energy prices will accelerate it and make the rise last longer, increasing the risk that inflation expectations will be higher.
In Europe, the President of the ECB, Christine Lagarde, has reiterated that the rise in inflation is mainly due to temporary factors, although she has warned that price pressures could become more persistent if supply bottlenecks or salary increases exceed expectations. Be that as it may, we do not rule out that the ECB will have to toughen its policy earlier than predicted to contain the CPI.
In Turkey, meanwhile, President Recep Tayyip Erdogan remains committed to the idea that rising inflation is battling with lower interest rates. To ensure that the country’s central bank goes with its flow, Erdogan fired three top officials of the country’s central bank in a midnight decree that brought the country’s currency to record lows. The question now is whether Turkey’s problems could drag down to the rest of the emerging economies.
