# Inflation trumps financial risks as central bank tightening set to continue Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2023-04-12 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Global Central Banks Tighten Policy Amid Inflation Concerns Meta Description: Despite banking sector stress, major central banks set to raise interest rates to combat inflation risks. IMF warns of global economic crack-up. URL: https://financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continuehtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2023-04-12t100338z1lynxmpej3b0b7rtroptp4imf-worldbank-central-banks-1736814167105-compressed.jpg) # Inflation trumps financial risks as central bank tightening set to continue By Howard Schneider, William Schomberg and Balazs Koranyi WASHINGTON/LONDON/FRANKFURT (Reuters) – Despite broad warnings about the economic risks posed by recent stress in the banking sector, global monetary policymakers are keeping their focus squarely on inflation and the need to continue raising interest rates to tame it. The call for caution has come from top officials at the International Monetary Fund who are worried about a global crack-up, from bond markets flashing recession signals, and from policymakers themselves who say they are monitoring the details of banking data and the mood of industry executives for signs of trouble. Still, three of the world’s four major central [banks at this point are on track to raise interest rates when they next meet](https://www.financedigest.com/banking-stability-worries-go-behind-closed-doors-at-imf-world-bank-meetings.html "Banking stability worries go behind closed doors at IMF-World Bank meetings"), a step U.S. markets [bet will set the stage for cuts in borrowing costs](https://www.financedigest.com/bmw-bets-on-design-and-recycling-not-mining-to-lower-battery-costs.html "BMW bets on design and recycling, not mining, to lower battery costs") soon after as recession arrives. In their latest World Economic Outlook, IMF officials on Tuesday trimmed their forecast for world growth, but said there were “plausible” scenarios, flowing from the recent [failures of Silicon Valley Bank](https://www.financedigest.com/bank-of-england-fines-former-tsb-executive-over-2018-it-failure.html "Bank of England fines former TSB executive over 2018 IT failure") and Signature Bank in the U.S. and the forced merger of Credit Suisse, that could cut growth even deeper, while more serious [banking problems and tighter credit](https://www.financedigest.com/explainer-what-are-credit-default-swaps-and-why-are-they-causing-trouble-for-europes-banks.html "Explainer-What are credit default swaps and why are they causing trouble for Europe’s banks?") could leave the global economy stalled altogether. In contrast, monetary policymakers, even in the wake of the recent financial stress, seem primed to do more to combat high inflation that they still view as the [greater risk](https://www.financedigest.com/brexit-the-risks-to-the-city-and-fintech-have-never-been-greater.html "BREXIT: THE RISKS TO THE CITY AND FINTECH HAVE NEVER BEEN GREATER"). The onus remains on ensuring enough monetary tightening is delivered to ‘see the job through’ and sustainably return inflation to target,” Huw Pill, the Bank of England’s chief economist, said last week, [warning that inflation risks](https://www.financedigest.com/tesla-to-warn-of-data-privacy-risk-from-car-security-cameras-in-germany.html "Tesla to warn of data privacy risk from car security cameras in Germany") were “skewed significantly to the upside. Though headline [inflation in the United Kingdom was set](https://www.financedigest.com/european-shares-set-for-weekly-gain-on-u-s-inflation-outlook.html "European shares set for weekly gain on U.S. inflation outlook") to drop from above 10%, the highest rate in the developed world, Pill said the “potential persistence of domestically generated inflation” remained a barrier to reaching the 2% target. A similar dilemma is emerging in Europe and the U.S., parts of the world that [share a 2% inflation](https://www.financedigest.com/britains-next-sees-lower-clothing-inflation-shares-dip-on-cautious-outlook.html "Britain’s Next sees lower clothing inflation, shares dip on cautious outlook") goal and a sense that the underlying pace of price increases has gotten stuck at a level much higher than that. The outlier remains Japan, where long-stagnant inflation and wage growth are only now showing budding signs of change. Bank of Japan Governor Kazuo Ueda, in his inaugural news conference on Monday, stressed the need to keep an ultra-loose monetary [policy to help sustainably achieve a 2% inflation](https://www.financedigest.com/boes-mann-falling-headline-inflation-high-core-make-policy-difficult.html "BoE’s Mann: Falling headline inflation, high core, make policy difficult") target. ## NOTHING ‘BROKEN’ YET International economic officials gathering in Washington this week for the IMF and World [Bank spring meetings can take some comfort that pandemic-era risks](https://www.financedigest.com/strategies-banks-use-to-manage-liquidity-risk.html "Strategies Banks Use to Manage Liquidity Risk") are continuing to diminish. The COVID-19 health [crisis has eased](https://www.financedigest.com/bank-shares-rise-after-credit-suisse-rescue-eases-crisis.html "Bank shares rise after Credit Suisse rescue eases crisis"), with commerce largely back to normal. What seemed an incipient global recession just months ago has given way to continued, if slow, growth, even in the [euro zone](https://www.financedigest.com/euro-zone-consumers-more-optimistic-on-inflation-ecb-survey-shows.html "Euro zone consumers more optimistic on inflation, ECB survey shows") where output had seemed on the verge of shrinking. An aggressive year of central [bank rate hikes hasn’t yet “broken” any of the economies](https://www.financedigest.com/bank-of-canada-seen-on-hold-even-as-economy-accelerates.html "Bank of Canada seen on hold even as economy accelerates") involved, with the U.S. [unemployment rate](https://www.financedigest.com/spains-unemployment-rate-inches-up-to-12-87-in-q4-2022.html "Spain’s unemployment rate inches up to 12.87% in Q4 2022") at 3.5%, near its lowest level since the late 1960s. Even if borrowing costs are set to move higher, the current tightening cycle is likely [nearing its end](https://www.financedigest.com/exclusive-nissan-seeks-tech-tie-up-without-renault-as-alliance-nears-end-of-road.html "Exclusive-Nissan seeks tech tie-up without Renault as alliance nears end of road") as officials zero in on a level they feel is adequately restrictive to pull inflation into line. Still, that terminal rate remains unclear, and the end of synchronized tightening by the Fed, BoE and European Central [Bank doesn’t mean](https://www.financedigest.com/banking-turmoil-means-recession-fears-are-creeping-back.html "Banking turmoil means recession fears are creeping back") tight monetary policy is going away. Far from it. [Central bankers](https://www.financedigest.com/inflation-fighting-central-bankers-air-climate-role-doubts.html "Inflation fighting central bankers air climate role doubts") have begun to concede a key point: A normalizing global economy won’t foster an easy return to the pre-pandemic era’s low inflation trends. Developments that policymakers thought would get them far along that road, such as the repair of global [supply chains](https://www.financedigest.com/minimising-supply-chain-cyber-risks-by-asking-the-right-questions.html "MINIMISING SUPPLY CHAIN CYBER RISKS BY ASKING THE RIGHT QUESTIONS"), have taken place as expected. But the help in [lowering inflation](https://www.financedigest.com/spains-inflation-to-be-lower-this-year-than-in-2022-minister.html "Spain’s inflation to be lower this year than in 2022 -minister") has been less than anticipated, largely confined to slowing price increases for goods. [Price pressures](https://www.financedigest.com/oil-prices-dip-on-u-s-crude-reserve-release-inflation-pressure.html "Oil prices dip on U.S. crude reserve release, inflation pressure") for services have shown little moderation. ### ‘ENTRENCHED’ INFLATION In Europe, after dodging recession and weathering a winter with lower-than-anticipated energy prices despite the war in Ukraine, [inflation concerns have moved from the oil-driven headline rate](https://www.financedigest.com/german-inflation-rate-to-ease-over-course-of-2023-econ-minister.html "German inflation rate to ease over course of 2023 – econ minister") to an array of “core” prices that keep rising. Wages, services and food are driving price growth to the point that the [ECB’s](https://www.financedigest.com/explainer-oil-price-surge-changes-ecb-narrative-only-at-the-margins.html "Explainer-Oil price surge changes ECB narrative only at the margins") attention has shifted almost entirely to underlying inflation on fears that rapid price growth is at risk of getting stuck above target. Philip Lane, the ECB’s normally cautious chief economist, even [put multiple rate hikes on the table as core inflation](https://www.financedigest.com/boes-bailey-says-rate-setters-can-put-inflation-before-bank-worries.html "BoE’s Bailey says rate-setters can put inflation before bank worries") ticked up to a record-high 5.7% last month. Overall inflation is almost 4 percentage points below its October peak. Under our baseline scenario, in order to make sure inflation comes down to 2%, more hikes will be needed,” Lane was quoted as [saying by the German](https://www.financedigest.com/german-minister-says-on-right-track-to-solving-co2-emitting-car-row.html "German minister says ‘on right track’ to solving CO2-emitting car row") newspaper Die Zeit on March 29. A U.S. measure often cited by Fed officials, the “trimmed mean” [inflation rate excluding goods with the largest and smallest price](https://www.financedigest.com/oil-ticks-up-as-u-s-inflation-cools-but-prices-set-for-monthly-drop.html "Oil ticks up as U.S. inflation cools, but prices set for monthly drop") movements, has shown little improvement, moving from 4.75% in August to just 4.59% in February. The U.S. [central bank is expected to increase its benchmark overnight interest rate](https://www.financedigest.com/central-banks-keep-hiking-rates-amid-banking-turmoil.html "Central banks keep hiking rates amid banking turmoil") by another quarter of a percentage point next month, and signal whether more hikes may be warranted. The U.S. labor market remains strong, with inflation now focused in sectors that are both the most labor-intensive and, by some research, the least sensitive to higher rates – bad news for the Fed, and a dynamic that may [drive rates higher](https://www.financedigest.com/maserati-aims-at-driving-margins-higher-before-any-spin-off-talk.html "Maserati aims at driving margins higher before any spin-off talk"). TD Securities macro strategists Jan Groen and Oscar Munoz recently concluded that some of the pandemic-era inflation had become “entrenched,” with the U.S. personal consumption expenditures price index, excluding food and energy costs, likely to get lodged at a rate around 3%. If that “core” PCE rate, which is closely monitored by the Fed, is as persistent as thought, they wrote, the U.S. central [bank will “have to choose](https://www.financedigest.com/5-things-to-consider-when-choosing-a-challenger-bank.html "5 Things to Consider When Choosing a Challenger Bank") between its inflation target or aggressive easing” to deal with an eventual rise in the unemployment rate. The likely outcome, they said, is that interest [rates will remain higher than anticipated as inflation](https://www.financedigest.com/uk-inflation-rate-unexpectedly-rises-to-10-4-in-february.html "UK inflation rate unexpectedly rises to 10.4% in February") continues to be the priority. The IMF’s chief economist, Pierre-Olivier Gourinchas, contends that focus is correctly placed given [financial stability](https://www.financedigest.com/g7-finance-leaders-pledge-financial-stability-supply-chain-diversity.html "G7 finance leaders pledge financial stability, supply chain diversity") risks appear for now to have subsided. “Is it causing potentially catastrophic financial instability further down the road and, as a result, should they sort of refrain from doing this?” he said in an interview with Reuters on Tuesday. “Our assessment on this is no, because the financial instability looks very much contained.” Moreover, not acting sufficiently to contain inflation would be “creating a problem of its own.” (Reporting by Howard Schneider, William Schomberg and Balazs Koranyi; additional reporting by David Lawder in Washington and Leika Kihara in Tokyo; Editing by Dan Burns and Paul Simao) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---