Central banks are facing challenges in managing the 'last mile' of the economy, despite falling inflation rates. While headline inflation may be low, there are still pockets of inflationary pressures in certain sectors. Central banks need to carefully navigate this situation to ensure that their policies are effective. It is important for central banks to understand the underlying drivers of inflation and the potential risks associated with it. The article emphasizes the impact of inflation on monetary policy and the challenges faced by central banks in maintaining price stability. Central banks are urged to remain vigilant and proactive in managing inflationary pressures.
Czech central banker Jan Kubicek is considering an interest-rate cut next week, but lingering inflation risks are giving him pause. The decision will depend on fresh forecasts and a discussion with colleagues. Policymakers in Prague need to weigh a stagnant economy against potential inflation flare-ups. Consumer-price growth is projected to drop to a 2% target next year. Market expectations for policy easing are on the ambitious side.
Meanwhile, Russia's central bank is preparing to lift interest rates to curb inflation, which is seen as a significant threat to the country's financial institutions and markets. The bank has already doubled the key rate to 15% and may increase it by up to a percentage point next month if inflationary risks persist. President Vladimir Putin supports the rate increases, despite the potential negative impact on businesses and households. The rate hikes are necessary to fund the war budget and ensure victory in Ukraine. The Finance Ministry expects expenditure to grow by a quarter next year, reaching 36.6 trillion rubles ($393 billion). Inflation is a top concern for Russians, with price growth averaging 12.1% in the third quarter. The central bank expects inflation to be faster than anticipated, reaching 7%-7.5% by the end of this year and potentially exceeding the 4% target next year. The bank's approach to monetary policy is reminiscent of the 1970s Bundesbank playbook, with a focus on conservative orthodox policies to shield the currency and inflation from shocks. However, this approach could be excessively tough and have negative consequences for the financial market, including unsubsidized mortgages and lending to consumers and companies. The central bank's actions may lead to a contraction in credit growth and a recession in the first half of 2024. The bank believes that a higher key rate is necessary for price stability, despite concerns that the impact of previous rate hikes has not fully materialized.
Central bankers' decision to raise interest rates and rein in monetary policy has paid off, but the outcome has fallen short of expectations. Some economists suggest changing the inflation target from 2% to 3% to avoid a low-inflation trap. However, changing the target would dent the credibility of central bankers. The drastic fall in the real money supply has failed to get rid of inflation, and the rise in the cost of financing might bring economic growth close to zero. Central bankers have four options: prioritize the fight against inflation, engage in tentative policymaking, follow a fixed rule of interest-rate targeting, or make aggressive interest rate cuts. Doing nothing would be the best choice, while cutting interest rates would be perceived as a willingness to tolerate inflation. Central bankers are uncertain about the speed and intensity of transmission mechanisms from interest-rate manipulation to money supply and price inflation.
The upcoming US inflation data is expected to have an impact on Bitcoin and gold prices.
This article discusses the factors that can contribute to a continued decline in inflation. It highlights the impact of technological advancements, globalization, and demographic changes on inflation rates. The author argues that these factors have created a disinflationary environment, where inflation remains low and stable. The article also mentions the role of central banks in maintaining price stability and the potential risks of deflation. Overall, it provides insights into the various forces that can influence inflation and the challenges faced by policymakers in managing it.
Most advanced economies enjoyed a long period of low, stable inflation prior to 2021, driven in part by factors external to monetary policy such as globalization and de-unionization. However, emerging trends may present headwinds to central banks trying to keep inflation steady. These trends include deglobalization, increased fiscal pressures, and the zero lower bound on interest rates. These factors could make the job of central banks more difficult and lead to more frequent inflation spikes. Achieving and maintaining price stability will require a strong commitment to inflation targeting and addressing the challenges posed by political pressures and changing economic forces.
The article 'Risks facing central banks: action and inaction' highlights the risks faced by central banks in terms of action and inaction in managing inflation. It emphasizes that central bank actions in this century do not appear overly accommodative compared to the Federal Reserve's policy in the 1990s. The aims of economic policy are broadly agreed upon, with success defined as brisk growth combined with low and stable levels of unemployment and inflation. The article also mentions the importance of avoiding excessive levels of money supply and asset.
Paul Volcker, known for taming inflation in the US, is featured in a discussion on the impact of high inflation on society. Pakistan has experienced skyrocketing inflation, particularly affecting the poor. The article explores the connection between political instability and high inflation, drawing parallels to Weimar Germany. Economists debate the effectiveness of high interest rates in controlling inflation. The recent decision by Pakistan's central bank to keep interest rates unchanged at 22% is scrutinized, with some analysts calling for a rate cut to stimulate economic growth. Factors such as higher-than-anticipated inflation in advanced economies, the end of globalization and free trade, and the risk of currency depreciation are cited as reasons for maintaining high interest rates. The article concludes that central bankers should resist political and social pressure and make decisions based on what is right, similar to Paul Volcker.
The article 'The one-two punch of high inflation and high interest rates' by Dana M. Peterson and Stephanie Guichard discusses the impact of high inflation and high interest rates on the economy and consumer confidence. The authors argue that the combination of these two factors can have a detrimental effect on economic growth and stability. They highlight the importance of managing inflation and interest rates effectively to maintain consumer confidence and support economic recovery. The article emphasizes the need for policymakers to strike a balance between controlling inflation and supporting economic growth. It also mentions the potential risks of inflation expectations becoming unanchored and the challenges faced by central banks in managing these risks. The authors suggest that a comprehensive approach is needed, including fiscal and monetary policy measures, to address the challenges posed by high inflation and high interest rates. The article concludes by emphasizing the importance of proactive policy actions to mitigate the negative impact of these factors on the economy and ensure sustainable growth.
Source: Central Banking
Brookings Institution [ad97b2b4] The Wall Street Journal [66fcebaf] Central Banking [79f7df09] DAWN.com [db276783] Pittsburgh Post-Gazette [546dbed3]