Top Central Bankers Expect More Rate Increases Amid Stubborn Inflation

Central bankers in the world’s major economies on Wednesday hiked interest rates significantly, but said it was very likely that more hikes would be needed to bring inflation back under control given the strength of the labor market. rice field.

“The policy, while restrictive, may not be restrictive enough, and was not restrictive enough for a period of time,” said Federal Reserve Chairman Jerome H. Powell.

Speaking at the 10th European Central Bank Annual Meeting in Sintra, Portugal, Mr. Powell said a strong labor market “is driving the economy,” which is why Fed officials are calling for two more rate hikes this year. said to be the main reason for anticipation.

Promoting U.S. workers and earning higher wages stimulates demand, which enables economic growth and gives businesses the ability to continually raise prices.

The Fed broke the record for 10 straight rate hikes this month by keeping rates unchanged in the 5% to 5.25% range. But Mr. Powell said Wednesday that the decision does not indicate the frequency of future moves. Skipping June may not mean the new normal of raising rates at every meeting.

“All we have decided is not to raise rates at the June meeting,” Powell said. “We have absolutely no intention of removing travel for back-to-back meetings from consideration.”

European Central Bank President Christine Lagarde and Bank of England Governor Andrew Bailey also spoke at the same panel, saying tight labor markets in economies were also pushing up wages and increasing inflationary pressures.

“We still have room to cover,” Lagarde said, reiterating that the ECB raised rates by a quarter of a percentage point in June and is likely to raise them again in July.

Central bankers from all over the world, from Canada to South Africa, gathered in Sintra to discuss monetary policy amid global inflation. While inflation has slowed slightly in major economies such as the United States and Europe, policymakers spent much of the meeting declaring premature victory given high uncertainty about some inflation drivers, such as uncertainty. spent discussing the risks faced in Energy markets are asking questions about how companies will respond to rising labor costs.

After more than a year of aggressive interest rate hikes in the US, UK and euro-using European countries, central bank actions have diverged significantly over the past month. The Fed kept rates on hold, the European Central Bank raised rates by a quarter of a percentage point to signal more interest rates to come, and the Bank of England unexpectedly raised interest rates by half a percentage point.

The Bank of Japan is unusual and has maintained a very accommodative monetary policy stance even as Japan’s inflation rate rises to its highest level in 40 years.

Bank of Japan Governor Kazuo Ueda will end his term in April. Speaking at a panel discussion, Ueda said headline inflation was above 3%, but Japanese officials believed the underlying measure of inflation was still slightly below the 2% target. “Therefore, we will not change our policy,” he said.

Headline inflation has fallen in Europe and the US this year, but this has provided policymakers with limited comfort. While there are still strong signs of domestic inflationary pressures from rising wages in the service sector, the common challenge is how to reach the 2% inflation target.

Mr. Powell said the United States “still hasn’t made much progress” on inflation in labor-intensive service sectors such as hotels, restaurants and financial services. He added that officials “need to watch for further softening of labor market conditions.” He does not expect core inflation to fall to 2% by 2025.

Powell stressed that many officials at the June meeting expected “two or more” additional rate hikes in 2023.

Lagarde said on Wednesday that in the eurozone, “we still don’t see enough concrete evidence that underlying inflation, especially domestic prices, is stabilizing and declining.” So policymakers want to make sure interest rates are capped for a long time, until inflation is sure to come down.

In Britain “that’s the crux, that’s the problem,” Bailey said. He added that “the situation is even stronger” as the labor market is tight, partly because the workforce is still smaller than it was before the pandemic.

Bailey said investors expected the bank to raise rates a few more times, but instead of denying or accepting those expectations, he just said, “Let’s wait and see.”

Measures of core inflation, excluding food and energy, and services inflation, which is heavily influenced by corporate wage costs, remain uncomfortably high. In the UK, core inflation rose to 7.1% last month, while it was 5.3% in the US and eurozone.

Frédéric Ducrozet, head of macroeconomic research at Pictet Wealth Management, said: “Despite the differences between the two countries, there is a common understanding that they are gearing up for the next phase of the inflation process. there is,” he said. Not so much.

Policymakers are also looking at how quickly the effects of higher interest rates will ripple through their economies as a means of judging how effective monetary policy is. Bailey said the shift from variable to fixed-term mortgages in the UK has slowed the transmission of monetary policy. “History will not be a good guide,” he added. Lagarde said similar but uneven changes were taking place in the eurozone.

The Bank for International Settlements recently warned that “last mile travel could be difficult” even with lower inflation.

Inflation could be more stubborn than expected as workers demand higher wages to make up for lost purchasing power over the past year or two. However, companies may choose to pass on that extra labor cost to their customers. “Inflation could remain uncomfortably high under this scenario,” the bank said in its report. This was a concern Lagarde reiterated on Tuesday.

Powell and Lagarde said inflation could be eradicated without triggering a recession, even as analysts increasingly believe their efforts will lead to a recession.

“Recessions are not included in our criteria,” Lagarde said. “But that’s part of the risk there.”

Gina Smirek Contributed to the report.

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