September 29 (Reuters) – Central banks that launched massive emergency aid to fight the pandemic last year are now considering a global shift in the other direction, with loopholes already appearing in their perceived risk of inflation, the need to respond to it and the pace of the likely return to normal monetary policy.

They face common supply shocks and common risks around a pandemic that continues to shape trade.

“Globally, we are still in a long process” of reopening and adjusting to the post-pandemic economy, Federal Reserve Chairman of St. Louis, James Bullard, said this week in an interview with Reuters.

But the reopening, and in particular the associated inflation, is felt differently in the developed world, testing the understanding of those responsible for the post-pandemic economy and their ability to meet a common inflation target of 2% without derailing the economy. global growth.

The heads of the world’s four big central banks are meeting on Wednesday for a largely virtual European Central Bank forum, and while the past year has been marked by a uniform rush to avoid the worst, their exit strategies are already diverging.

This has led to significant political wrangling in both Europe and the United States over the level of inflation risk central banks should tolerate as they attempt to offset price weakness since the Great Recession ago. ten years – a major bet, indeed, on whether the post-pandemic world will function as before.

Policy divergences among the world’s major central banks can influence markets around the world, altering capital flows, exchange rates and the pattern of trade. There may even be limits to the extent to which a central bank like the Fed could go in normalizing its policy or increasing interest rates if major partners like the ECB do not move forward in the same. direction.

It is still early in the transition from the pandemic, but differences are already emerging.

“The main challenge is to ensure that we do not overreact to transient supply shocks,” ECB President Christine Lagarde said Tuesday at her bank’s first research conference, and the policy ” must remain focused on safely exiting the economy from the pandemic emergency “rather than stifling any short-term price increases.

Like the ECB, the Fed is also counting on lower inflation largely on its own. But the discussion of risks has become more important, and in projections last week, virtually all Fed officials said inflation was more likely to be higher than expected than not.

Even as Lagarde spoke, Fed Chairman Jerome Powell testified before the US Congress about the “bottlenecks, hiring difficulties and other constraints” that have led the Fed to project inflation this year at 4. , 2%, or double the official target, and could make it more persistent. .


The potential problems are manifold. The pandemic is still raging, and although businesses and consumers have adapted to a large extent, it still determines who shows up for work, what goods and services are produced, and how quickly those goods are moved around the planet. and how smooth these services are. book.

Workers are finding new jobs, but slower than expected in many places. The supply shocks that started with the first coronavirus shutdowns in 2020 continue to reverberate, whether in the form of fuel shortages in the UK, German auto factories awaiting computer chips, factories Americans lacking industrial products, lagging shipping routes or rising prices.

The Fed said last week that it was nearing its first steps to end the emergency bond purchase launched in March 2020, and half of U.S. policymakers at their last meeting said that rates are d interest may have to increase next year.

For the Bank of England, the tipping point may already be in sight, with markets expecting a rate hike no later than February, and annual price hikes of 4% are starting to be felt in public opinion.

“Discussions of a ‘cost of living’ crisis are gaining ground … and the public may look to the BoE to lean against inflation risks resulting from the pandemic,” Deutsche Bank economist wrote on Friday. Sanjay Raja in a note to clients. .

Japan’s core consumer inflation index, by contrast, held steady in August, indicating that the country’s decades-long battle against low prices continues. Wholesale prices are rising, driven by global commodity inflation, but growth is weak and Bank of Japan policy is expected to remain flexible.

The ECB played down any post-pandemic policy change.

The purchase of bonds through its Emergency Pandemic Purchase Program will be refused under the legislation that authorized it. But the bank is expected to expand other programs to partially offset it, with Lagarde arguing that inflation staying below the 2% target is a greater risk than prices constantly soaring above it.

Looking back over the past decade, this is a natural concern.

By 2012, all major central banks set their preferred inflation target of 2%, then continued to persistently miss it during a decade of sluggish growth.

The political bias now is to get it wrong on the other side – and hope the world co-operates.

Reporting by Howard Schneider; Editing by Dan Burns and Andrea Ricci