Macroscope | Central banks forced to continue raising interest rates despite slowdown after months of dithering

Having spent months convinced price pressures were transitory, policymakers have much to answer for as they scramble to combat inflation

While there is a chance tighter policy can bring down prices sufficiently without causing a recession, it is an increasingly slim one

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Bread is seen for sale at a farmers’ market in Chicago, on July 16. Amid the highest US inflation in four decades, bread prices have soared, pushing premium options to an unheard-of US$10 a loaf and beyond. Photo: Bloomberg

Published: 1:30am, 22 Jul 2022Updated: 2:09am, 22 Jul 2022

Since the beginning of this year, it has been clear that the world’s major central banks got inflation spectacularly wrong. The members of “Team Transitory” – the group of leading policymakers who until recently were convinced price pressures were temporary, and would abate once the Covid-19 pandemic subsided – have a lot to answer for.

As recently as last September, the US Federal Reserve was not even sure whether it would raise interest rates this year. While its complacent view of inflation stemmed from a number of factors, one of the most important was the amount of time it took for the Fed and other Western central banks to accept that the 40-year period of subdued prices had come to an end.

However, once policymakers acknowledged the “Great Moderation” – the term used to describe the period of steady growth and inflation since the mid-1980s – had run its course, they fervently embraced tighter policy.

From the moment the Fed signalled last December that it would raise rates at a faster pace than anticipated, a series of aggressive increases in advanced economies ensued. A growing number of central banks, including those in Canada and Australia, have implemented large rate rises of half a percentage point or more. Next week, the Fed is set to increase borrowing costs by at least three-quarters of a percentage point.

Yet, no sooner did central banks pivot towards tighter policy than investors began to fret about growth. In the past several months, the pendulum of market anxiety has swung away from high inflation towards a sharp slowdown.

Bank of America published its latest global fund manager survey on Tuesday. It showed expectations for global growth fell to their lowest level since the poll’s inception in 1994, with most respondents expecting a recession.

.css-1m2rp1p{color:#34b8b5;}Macroscope | Central banks forced to continue raising interest rates despite slowdown after months of dithering

Macroscope | Central banks forced to continue raising interest rates despite slowdown after months of dithering