The global economy and inflation have so far proved surprisingly resilient to a barrage of interest-rate increases, prompting top central bankers on Wednesday to promise more of the same.
Appearing together in Sintra, Portugal, US Federal Reserve Chairman Jerome Powell, European Central Bank (ECB) President Christine Lagarde and Bank of England (BOE) Governor Andrew Bailey all said they had a way to go in reining in too-high inflation.
“Although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough,” Powell said at an ECB-hosted panel discussion that also included Bank of Japan (BOJ) Governor Kazuo Ueda.
Photo: EPA-EFE
Noting that most Fed policymakers expect to raise rates at least two more times this year, Powell left the door open to the US central bank increasing borrowing costs at two consecutive meetings after it took a break from tightening at a gathering earlier this month.
Lagarde, for her part, suggested that an ECB rate increase next month was a virtual certainty, though she was less committal on what policymakers would do at their subsequent meeting in September.
Meanwhile, Bailey vowed to do what was necessary to bring inflation back to 2 percent after the BOE surprised investors by boosting rates a half percentage point this month.
Ueda was the odd one out, emphasizing that Japan’s rates are on hold because underlying inflation remains below 2 percent. Even so, he outlined the potential for a change if the BOJ becomes more confident that 2 percent price gains would materialize next year.
Last year, the Fed, ECB and BOE embarked on their most aggressive credit tightening in decades in a bid to bring inflation back down to their 2 percent targets.
Despite fears that it would trigger a global recession, the world economy has so far held up.
However, underlying inflation has also been persistent.
Powell said it would not be until 2025 that the core inflation measure falls to 2 percent, and voiced concern that the longer inflation stays high, the greater the risk that it would become entrenched in the economy.
“The passage of time is not our friend here,” he said.
He and Bailey zeroed in on the tightness of their respective job markets, portraying it as a source of strength for the economy, but also as a fuel for inflation.
Powell acknowledged that a recession was possible because of the Fed’s actions, though that is not his base case.
Others on the panel were equally cautious.
While the BOE is not forecasting a recession, “we have to watch it very carefully,” Bailey said.
In the end, the central bankers made clear that their No. 1 aim was taming inflation — even if that meant that their economies would have to suffer through tough times as a result.
Separately, Sweden’s central bank yeserday raised its key interest rate to its highest level in 15 years, as inflation remains too high.
The Riksbank raised the rate by 0.25 percentage points to 3.75 percent.
“The Riksbank’s policy rate increases are having an effect, but for inflation to return to the target of 2 percent within a reasonable period of time, monetary policy needs to be tightened further,” the central bank said in a statement.
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