The world’s top central bankers have warned that an era of low interest rates and moderate inflation is over following Russia’s invasion of Ukraine and a “major geopolitical blow” from the coronavirus pandemic.
At the European Central Bank’s annual conference, Christine Lagarde, its President, Federal Reserve Chair Jay Powell and Bank of England Governor Andrew Bailey called for swift action to curb inflation.
He added that a failure to raise interest rates sharply could be the reason for high inflation and ultimately require central banks to take more drastic action to mitigate the rate hikes.
“There will likely be some pain in this process, but the worst pain will come from not addressing this high inflation and letting it persist,” Powell said.
In a speech in Sintra, Portugal, central bank governors said the pandemic and war in Ukraine would reverse many of the factors that had led to more than a decade of extremely low inflation in most developed economies. He warned that the disintegration of the global economy into competitive blocs risks disrupting supply chains, reducing productivity, raising costs and stifling growth.
“I don’t think we’re going to go back to that low-inflation environment,” Lagarde said. “There are forces that have been removed as a result of the pandemic [and] As a result of this massive geopolitical shock that will change the picture and landscape in which we operate. ,
“Some would argue that the place you are building [or] The location from which you provide the services is determined by various factors in addition to the costs,” said the ECB President. He said some places are likely to be politically relevant, “friend or foe.”
Powell said the momentum of these changes would force a rethink of how the world’s central banks operate, noting that the low-inflation environment is “over now”.
“We now live with other forces and have to think about monetary policy very differently,” he said. He said that in this environment, predicting inflation has become a much more difficult task. “We now better understand how little we understand about inflation.”
Bailey said there has been “a sea change” in the way economies work and that Covid is leaving “a structural legacy in labor markets and the way they behave” in the UK, leading to a great deal of lowering employment and exorbitant wage growth. with risk.
Lagarde said the war in Ukraine is hitting Europe harder than other regions in the form of higher energy and food prices, meaning the continent is “not in the same position” as the US and other countries.
But he warned that “what’s happening on the energy front” [and] “What happens on the war front” will affect inflation expectations. This could require the ECB to switch from its current “gradual” approach to raising interest rates – with a quarter percent hike in July – in favor of a “firmer” monetary policy stance.
Powell vowed to prevent a “hyperinflationary regime” from taking hold in the US and underscored the central bank’s desire to raise interest rates sharply this year. The Fed last resorted to measures it used more than 30 years ago, raising interest rates by 0.75 percentage points earlier this month to push the federal funds rate towards a new target range of 1.5 to 1.75 percent reduce.
Top officials have announced another big rate hike at the next monetary policy meeting in July, with the benchmark interest rate set to reach around 3.5 percent by the end of the year.
Lagarde said the European economy has also been hit by higher spending on services such as tourism and travel during the pandemic, boosting eurozone growth but also causing “a series of setbacks”. leading to additional price pressure. ,
The ECB President said central banks and governments would no longer “work hand in hand” as they did during the pandemic, instead it was now important for fiscal policy to become “more targeted” and “sustainable”.