Central banks may differ over inflation, Covid

A clerk counts renminbi banknotes at a bank outlet in Hai'an city in eastern China's Jiangsu province, Dec. 6, 2021. [Chinatopix Via AP]

Major central banks meet this week to assess risks from the new Omicron variant of the coronavirus even as they consider reducing emergency measures put in place nearly two years ago to fight the pandemic’s economic toll.

The global balancing act begins Tuesday when the Federal Reserve convenes for its latest two-day meeting, and includes new monetary policy statements by the US central bank on Wednesday, the European Central Bank and the Bank of England on Thursday, and the Bank of Japan on Friday.

All are facing some version of the same dilemma - whether the need to guard against inflation and end the current era of low-interest rates and central bank asset purchases is more urgent than the economic threat posed by the new variant - but their different approaches could make for a tumultuous year.

Inflation, labour markets and the link between the virus and economic performance are behaving differently across the major economies, setting up a potentially sharp divide over how central banks manage the coming stage of the pandemic.

That stands in contrast to the synchronised and massive wave of support approved at the outset of the health crisis in the spring of 2020.

The Bank of England had seemed recently on the verge of raising interest rates in a nod to high inflation, but policymakers have been set off course by Omicron’s fast spread and the imposition of new restrictions in the country.

They are now expected to hold the line on borrowing costs at their meeting this week in a reminder of the pandemic’s determinative role.

Michael Saunders, one of the two Bank of England policymakers who voted for a rate hike in November, said earlier this month that “there could be particular advantages in waiting to see more evidence on (Omicron’s) possible effects on public health outcomes and hence on the economy.”

Since then, the variant’s risks to the UK economy have intensified.

The ECB is likely to continue, and the Bank of Japan perhaps to commence, reducing some pandemic bond purchases at the margin, tentative steps reflecting the lower inflation and less fulsome economic rebounds in the euro zone and Japan.