Central bankers call for an end to the era of low interest rates and moderate inflation

The world’s top central bankers have warned that the era of low interest rates and moderate inflation is over after the “enormous geopolitical shock” from the Russian invasion of Ukraine and the coronavirus pandemic.

Speaking at the European Central Bank’s annual conference, Christine Lagarde, its president, Jay Powell, chairman of the Federal Reserve, and Andrew Bailey, governor of the Bank of England, called for swift action to rein in inflation.

They said failure to raise interest rates quickly enough could allow high inflation to become entrenched and eventually require more aggressive action by central banks to re-grow rates to more moderate levels.

“The process will likely involve some pain, but the worst pain will be from failing to address this high inflation and allow it to continue,” he said. Powell.

Speaking in Sintra, Portugal, central bank chiefs said the pandemic and the Ukraine war are upending many of the factors that have motivated more than a decade of ultra-low inflation among most advanced economies. They warned of the division of the global economy in competing blocks risk fracturing supply chains, lowering productivity, raising costs, and slashing growth.

“I don’t think we’ll go back to that low inflation environment,” Lagarde said. There are forces that were released as a result of the epidemic [and] As a result of this massive geopolitical shock that will change the picture and the landscape in which we operate.”

“Some would argue that where you are made [or] “Where services are provided from will be determined by factors other than just cost,” the ECB president added. She added that whether certain political websites were “friends or foes” was likely to be relevant.

Powell said these shifting dynamics will force a rethink of how the world’s central banks operate given that the low inflation environment “appears to be gone now”.

“We live with different forces now and we have to think about monetary policy in a completely different way,” he said. He added that forecasting inflation in this environment has become a more difficult task. “We now understand better how little we understand inflation.”

Bailey said there had been a “dramatic change” in the way economies function, and in the UK Covid was “leaving a structural legacy in labor markets and the way they behave”, with fewer jobs and increased risks of excessive wage increases.

Lagarde said the Ukraine war was hitting Europe more than most other regions in the form of rising energy and food prices, meaning the continent was “not in the same situation” as the United States and other countries.

But she warned that “what is happening in terms of energy [and] What happens on the war front “will affect inflation expectations. This may require the European Central Bank to do so Shifting from its current “incremental” approach to a rate hike – starting with a quarter-percentage point rise in July – to a “more specific” policy stance.

Powell pledged to prevent a “system of higher inflation” from taking hold in the United States, underscoring the central bank’s willingness to raise interest rates quickly this year. The Fed resorted to measures it last used more than 30 years ago, raising interest rates by 0.75 percentage points earlier this month to raise the fed funds rate to a new target range of 1.5 to 1.75 percent.

Senior officials pointed to another significant rate hike in Next policy meeting in Julywith the benchmark policy rate reaching nearly 3.5 percent by the end of the year.

Lagarde said the European economy is also suffering from a shift from more spending on goods during the pandemic to more spending on services such as tourism and travel, which has been supporting eurozone growth but also creating a “chain of shocks” that are fueling additional price pressures. .

The European Central Bank chief said central banks and governments are no longer working “in tandem” as they did during the pandemic, instead it is now important for fiscal policy to become more “targeted” and “sustainable”.