Central Bank chiefs get to share their troubles this week

 

Central Bank chiefs get to share their troubles this week

 

The trade-off between quelling inflation and cushioning growth is likely to be a recurring topic at the ECB gathering

President of European Central Bank Christine Lagarde will be joined by US Fed chair Jerome Powell and Bank of England governor Andrew Bailey at the ECB’s annual meeting in the Portuguese resort of Sintra.

 

MON, 27 JUN, 2022 - 09:09

CRAIG STIRLING

https://www.irishexaminer.com/business/economy/arid-40904177.html

 

When the central bank chiefs of the US, the eurozone, and the UK exchange views in public on Wednesday, the admonishments of politicians may still be ringing in their ears.

 

Just last week, US Federal Reserve chairman Jerome Powell was warned by Democratic lawmakers not to risk a recession, a message European Central Bank(ECB) president Christine Lagarde received in Brussels as well.

 

The Bank of England, led by governor Andrew Bailey, was recently accused of having been “flat-footed” on inflation.

 

The trio will appear together at the ECB’s annual meeting in the Portuguese resort of Sintra, a so-called retreat that’s unlikely to amount to much of an escape.

 

As each of them attempts to bring prices under control, they know their every move risks an impact on voters that can leave their political counterparts restless.

 

The trade-off between quelling inflation and cushioning growth is focusing minds at present, and is likely to be a recurring topic at the ECB gathering focused on “challenges for monetary policy in a rapidly changing world”.

 

The three policymakers will be sharing the stage with Bank for International Settlements (BIS) chief Agustin Carstens, whose institution on Sunday warned that the global economy risks entering a new era of stagflation which central banks need to keep in check.

 

Risk of stagflation

 

“The risk of stagflation looms over the global economy as the threat of a new inflation era coincides with a weaker outlook for growth and elevated financial vulnerabilities,” the BIS, which is commonly known as the “central bank for central banks” said in its annual report.

 

Decisive action may be key, Carstens told reporters presenting the report. “One strong result that we have obtained by our analysis of a soft versus a hard landing is that you are more likely to be on the soft landing side if you tighten in a timely and decisive fashion,” he said.

 

Some 70 central banks have raised borrowing costs and half of them — including the US Federal Reserve — have resorted to massive hikes of 75 basis points or more in one go.

 

Analysis by Goldman Sachs released in the past week suggested that the ECB may be least likely to hesitate about raising rates, even though its officials haven’t even begun.

 

Lagarde assured European leaders on Friday that she and her colleagues will take the steps required.

 

But confidence in that outcome is mixed. As an example, Ernest Urtasun, a European Parliament lawmaker from Spain, has already warned Lagarde of the risk of failure.

 

“Our fear is that while the ECB cannot tame inflation with higher interest rates, you could trigger a recession,” he said.

 

Record inflation in eurozone

 

Inflation in the euro area probably hit yet another record this month, with economists predicting data scheduled for Friday to show an 8.5% reading.

 

National figures are due earlier in the week, with Spanish and German readings both due to hit — and possibly create more unease — on the final day of the ECB’s Sintra gathering on Wednesday.

 

Confidence data the same day will likely show a drop to the lowest level since February 2021, as consumers and companies grow increasingly anxious about inflation and the knock-on effects of Russia’s war in Ukraine, now into its fifth month.

 

Elsewhere, a likely pickup in the US Fed’s favourite inflation gauge, another record inflation reading in the eurozone and minutes of the Bank of Japan’s latest meeting will keep investors on their toes.

 

Central banks in Sweden and Colombia may both hike rates too.

 

"With ‘long and variable lags’ between monetary policy moves and real-economy impact, the peak drag from the Fed’s rate hikes will likely occur in the second half of 2023. That’s when we expect a recession to hit," Anna Wong, Bloomberg's chief US economist said.

 

A slew of data out of Russia will provide the latest indication of how its economy is faring.

 

Retail sales probably plunged again in May as households become more frugal — and many Western goods are unavailable — and consumer costs rise.

 

At the same time, current-account readings will likely show that Russia’s balance sheet remains strong thanks to the windfall from higher commodities prices.