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Europe’s leading central banks are taking divergent steps when they face inflation




Europe’s leading central banks took divergent policy paths a day after the Federal Reserve set the stage for interest rate hikes in 2022, various approaches highlighting the challenges for decision-makers in balancing rising inflation and renewed risk of growth from the rapidly spreading Omicron variant of the coronavirus.

The Bank of England became the first of the world’s major central banks to raise its reference rate since the pandemic began, while the European Central Bank said it would phase out an emergency bond buying program while increasing other stimulus measures to keep the 19th-nation eurozone on track. .

Fed officials on Wednesday unveiled plans to accelerate the withdrawal of stimulus and signaled that they expect to raise interest rates three times next year, an important policy turning point that reflects increased concern about the potential for inflation to remain high.

The shifts show how the central banks̵[ads1]7; plans to phase out stimulus policies of several billion dollars and move towards higher interest rates are unfolding at different speeds in the world’s large economies, which are struggling with incomplete recoveries at the same time as inflationary pressures increase.

“I do not believe that anything happening in the Fed is bound to happen,” said ECB President Christine Lagarde at a news conference on Thursday. The economies of the United States, Britain and the eurozone are in different phases of the economic cycle, and received varying levels of government support during the pandemic, she said.

The Omicron variant, first identified in South Africa and now discovered in more than 70 countries, further overshadows the prospect of an already uneven global improvement.

Officials at the Bank of England’s Monetary Policy Committee on Thursday voted eight to one to raise the key interest rate to 0.25% from a record low of 0.1%, saying that the strength of the labor market meant that higher borrowing costs were appropriate to keep the price cap. growth.

BOE’s action came despite growing cases of the Omicron variant in the UK, which has triggered new restrictions in the run-up to Christmas in an attempt to stop a wave of infections that public health authorities say could overwhelm hospitals. The UK reported a record 78,610 Covid-19 cases on Wednesday, most recorded in a single day.

Omicron is a concern, but its economic impact is unpredictable, the majority of the panel said, and the rise did not justify the delay.

A Covid-19 vaccination center in Ramsgate, southeast of England, on Tuesday.


Photo:

Gareth Fuller / Associated Press

BOE’s decision was not widely expected. Although a rise in interest rates had been telegraphed, many investors and economists expected the central bank to remain stable until early next year while the economic effects of Omicron became clearer.

The pound strengthened 0.4% against the dollar. British government bonds sold out with the return on the 10-year benchmark benchmark index rising as high as 0.825% from 0.727% on Wednesday before closing at 0.760%.

The shares were mixed according to the central bank’s decisions, and the S&P 500 fell 0.5% on Thursday, a day after the broad stock meter closed at its second highest level ever.

The movements at the BOE and the Fed underline how expectations that high inflation would prove to be volatile give way to concerns that a period of rapid inflation and low unemployment risks stimulating wage and price increases, and maintaining inflationary pressures longer.

The ECB is taking a more cautious approach. The eurozone economy is still below pre-pandemic levels and appears to be declining sharply, although the US economy is accelerating above pre-crisis levels.

“It feels like central banks are beginning the monetary normalization process at different times,” said Mark Zandi, chief economist at Moody’s Analytics. He said that differences in each region’s labor markets in particular underpin their political choices.

“The UK labor market is leading the way,” he said, citing a continuing decline in unemployment after the end of September of a government wage subsidy program. “The United States is a little more distorted and Europe is flagging.”

The ECB said it would end its 1.85 trillion-euro bond purchase program, equivalent to $ 2.1 trillion, as planned in March, but expand a separate bond-buying program next year. In total, ECB bond purchases will decline to EUR 40 billion a month in April from approx. 80 billion euros a month at the moment, and will continue at least through October. The bank said it would not raise its key interest rate, which is currently set at minus 0.5%, before ending its net bond purchases.

“It is very unlikely that we will raise interest rates by the year 2022,” Lagarde said.

The ECB said it would gradually reduce its bond purchases to € 30 billion from July and € 20 billion from October. As an additional hedge, the ECB said it could resume its emergency bond buying program if necessary “to counteract negative shocks related to the pandemic.”

With the Omicron variant, “we are entering the realm of uncertainty,” Lagarde said. In that context, she said, it made sense to gradually reduce bond purchases.

The ECB’s decision to keep its bond buying program openly surprised analysts as it stood in stark contrast to the Fed’s decision to phase out bond buying completely.

While the Federal Reserve and other central banks around the world are handling rising inflation in the midst of the economic recovery from the pandemic, Turkey – where the exchange rate is currently above 20% – is issuing a warning. High inflation has led to economic turmoil after years of broad growth. Photo: Sedat Suna / Shutterstock

The euro rose 0.3% to trade at $ 1.1320, and the benchmark index for 10-year German government bonds rose to minus 0.348% on Thursday from minus 0.359% on Wednesday.

Supply chain bottlenecks are pushing Europe’s large manufacturing sector, and governments across the region have recently reintroduced social restrictions to contain a new wave of Covid-19 cases. Interest rates on southern European government bonds have risen since the summer, which has put pressure on highly indebted countries such as Italy.

Nevertheless, inflation in the eurozone has accelerated sharply, reaching 4.9% in November, the highest rate since the euro was launched in 1999 and well above the ECB’s 2% target. In Germany, inflation has reached 5.2%, uncomfortably high for a nation with deep historical fears of high inflation.

More than a dozen central banks have raised interest rates this year, according to the Bank for International Settlements data, as the global economy reopened after extensive restrictions to include Covid-19.

The Central Bank of Norway also raised its key interest rate on Thursday, despite the fact that the country is facing a separate increase in Omicron cases. Norges Bank raised the key interest rate to 0.5% from 0.25%, and said that a further increase is likely in March.

Write to Jason Douglas at jason.douglas@wsj.com and Tom Fairless at tom.fairless@wsj.com

Copyright © 2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



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