economy

Fed, ECB grapple with inflation and Omicron

Fed, ECB grapple with inflation and Omicron

Rising inflation and the spread of a new variant of the coronavirus will weigh on central banks minds this week as they meet to decide how quickly to withdraw their pandemic-era stimulus. As policymakers on both sides of the Atlantic contend with soaring inflation and the rate of infection of the Omicron variant, the US Federal Reserve is scheduled to announce its latest interest-rate decision on Wednesday, followed by the European Central Bank on Thursday. Both will have to carefully calibrate their response between raising rates and pulling the rug from under a tenuous recovery, or sticking to the status quo and letting inflation rise even further. In the US, the economy has heaved itself out of recession but employment figures have yet to reach pre-pandemic levels. The arrival of the Omicron variant has raised concerns of new economic disruption, supply chain bottlenecks and even higher prices. But the pick-up in US inflation to 6.8 percent year-on-year in November, the fastest pace since 1982, already seems to be pushing Fed policymakers towards a faster exit from its asset-purchase programme than first announced. - Fast Fed - Rising prices already induced the Fed in November to embark on the phase-out of its stimulus programme. Amounting to $120 billion a month, the purchases under the scheme were set to be progressively reduced by $15 billion a month, before being ended completely in June next year. But discussion has moved on since the meeting and at a congressional hearing last month, Fed Chairman Jerome Powell announced that the so-called taper -- as the asset purchase phase-out is known -- could end a few months sooner than planned, opening the door to rate hikes shortly afterwards. The question facing the Federal Open Market Committee this week will be how far to bring forward the date and what the new calendar for interest-rate increases will look like. Powell will announce the decision on Wednesday at his first press conference since being renominated by US President Joe Biden. But closing the taps too early could stall the US economys recovery from the initial shock of the coronavirus pandemic, said Oxford Economics analyst, Kathy Bostjancic. A strong signal for rate hikes in 2022 will put pressure on the ECB, which has so far not displayed much appetite for tightening monetary policy too quickly. ECB President Christine Lagarde has insisted that the spike in inflation is temporary and linked to one-off effects that will start to ease off next year. Eurozone inflation jumped to 4.9 percent in November, a record in the history of the single currency. - December decision - While the more hawkish members of the ECBs governing council will see new grounds to tighten monetary policy soon, the rise of the Omicron variant could require a little humility from policymakers, said Allianz chief economist, Ludovic Subran. The ECB is expected to confirm this week the planned end of its massive pandemic-era stimulus programme in March 2022. The 1.85-trillion-euro ($2.15-trillion) pandemic emergency bond-buying programme (PEPP) is the ECBs main crisis-fighting tool, aimed at keeping borrowing costs low to stoke economic growth. The question now is what will follow, and analysts speculate that the ECB will ramp up purchases under other programmes to avoid a cliff-edge where support is removed all at once at a delicate moment for the economy. The slower pace compared to the Fed means that the ECBs historically low interest rates will only be raised in 2023, analysts at ING predict. Indeed, ECB chief Lagarde said again earlier this month that a rate hike in 2022 was very unlikely, despite inflation pressures that could see the bank revise its forecast for 2022 above its two-percent target. The ECB will publish its new economic forecasts along with its monetary policy decisions on Thursday, including its first estimates for 2024. This story has been published from a wire agency feed without modifications to the text. Download.

economy 2021-12-13 Livemint