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Central bank chiefs call end to era of low rates and moderate inflation

The world’s top central bankers have warned that the era of low interest rates and moderate inflation has come to an end after the “massive geopolitical shock” of Russia’s invasion of Ukraine and the coronavirus pandemic.

At the European Central Bank’s annual conference, Christine Lagarde, its president, Federal Reserve chairman Jay Powell, and Bank of England governor Andrew Bailey, called for swift action to curb inflation.

They said not raising interest rates fast enough could lead to high inflation becoming embedded and ultimately more drastic action by central banks to return price growth to more moderate levels.

“The process will most likely involve some pain, but the worst pain would be if you don’t deal with this high inflation and let it become intractable,” Powell said.

In Sintra, Portugal, central bank bosses said the pandemic and the war in Ukraine have reversed many of the factors that had caused more than a decade of ultra-low inflation in most developed economies. They warned that the fragmentation of the global economy into competing blocs would risk breaking supply chains, reducing productivity, increasing costs and reducing growth.

“I don’t think we will go back to that low inflation environment,” Lagarde said. “Powers have been unleashed as a result of the pandemic [and] as a result of this huge geopolitical shock that is going to change the image and landscape in which we operate.”

“Some would argue that the place where you produce [or] the place from which you provide services is determined by factors other than just costs,” added the ECB president. Whether certain locations were politically “friends or foes” would likely be relevant, she added.

Powell said these shifting dynamics would lead to a rethinking of the way the world’s central banks operate, as the low inflation environment “seems to be over.”

“We now live with different forces and have to think about monetary policy in a very different way,” he said. Predicting inflation in this environment had become a much more challenging task, he added. “We now understand better how little we understand about inflation.”

Bailey said there had been a “sea change” in the way economies work and that Covid in the UK left “a structural legacy in labor markets and the way they behave”, with fewer jobs and greater risks of excessive wage increases.

Lagarde said the war in Ukraine is hitting Europe harder than most other regions in the form of higher energy and food prices, meaning the continent is “not in the same situation” as the US and other countries.

But she warned that “what’s happening on the energy front” [and] what is happening on the war front” will affect inflation expectations. This could lead the ECB to switch from its current “gradual” policy of raising interest rates – starting with a quarter of a percentage point increase in July – to a “more determined” policy stance.

Powell pledged to prevent a “higher inflation regime” from taking hold in the US, underlining the central bank’s willingness to raise interest rates quickly this year. The Fed has resorted to measures last used more than 30 years ago, raising interest rates by 0.75 percentage points earlier this month to push the federal funds rate to a new target range of 1.5 to 1.75 percent. to bring.

Top officials announced another major rate hike at the next policy meeting in July, with the key rate set to hit around 3.5 percent by the end of the year.

Lagarde said the European economy was also ravaged by a shift from higher spending on goods during the pandemic to more spending on services such as tourism and travel, supporting euro-zone growth but also triggering “a series of shocks” fueling additional price pressures. .

The ECB president said that central banks and governments no longer worked “hand in hand” as they had done during the pandemic, and that it was instead important now for fiscal policies to become “more focused” and “sustainable”.

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