© . The headquarters of the European Central Bank (ECB) is photographed in front of the skyline with its bank towers in Frankfurt, Germany, Nov. 22, 2017. REUTERS/Kai Pfaffenbach
By Howard Schneider, Balazs Koranyi and Leika Kihara (). the plate, from fuel to food. While Europe may be most vulnerable to a broader economic shock from the war, the European Central Bank made it clear on Thursday that the region cannot turn its back on rising inflation in the eurozone. Calling the war a “turning point” that could slow growth but boost inflation, the ECB agreed to stop pumping money into the markets this summer – paving the way for potential rate hikes later this summer. year, the first increase in more than ten years. “You can cut inflation any way you want and look at any key measure, it’s above target and rising. We have a 2% mandate and we are failing at it,” said an ECB policymaker, who asked not to be named. become. A similar story emerged in other Western countries, including the United States, as officials weighed the potential damage to their economies from the war against the ongoing rise in inflation. Growth in major economies is expected to remain above trend, allowing them to focus on inflation much faster than their usual 2% benchmark. The Bank of Canada raised interest rates earlier this month. The Bank of England and the Federal Reserve are expected to do so next week. Each is expected to follow with more increases in the coming months. Even fiscal policy officials — more sensitive to the politics of economic developments and often cheerleaders of more accommodative central bank policies — are well aware of the corrosive power of runaway price increases. Inflation “is a major concern,” Treasury Secretary Janet Yellen said on Thursday. “It hits Americans hard. They worry about the basic issues of the wallet.” With U.S. consumer inflation hitting a 40-year high, investors now expect the Fed to raise its target federal funds rate to levels between 1.75% and 2% by the end of the year, a quarter of a point higher than last year. week expected. The ECB is actually a latecomer to tightening and will have to pay a price for it. The euro has weakened sharply in recent weeks on the expectation that the ECB would ease its stimulus measures and that inflation would rise further due to higher import prices. Euro area inflation is above 5% this year, more than double the ECB’s 2% target, and it will take until 2024 to fall below that level again. “The Fed will tighten faster and the exchange rate will reflect that,” the ECB policymaker said. “I wouldn’t be surprised if there was more weakness in the euro after the Fed meeting next week. We have fallen behind other central banks.” Economists tried to warn the ECB on Friday, warning that high commodity prices could drag the eurozone into recession, but policymakers rejected this view. “Growth remains positive, there is no recession,” said François Villeroy de Galhau, head of the French central bank. OUTLOOK FOR ASIA MURKIER The outlier among major central banks is the Bank of Japan, which is expected to maintain very accommodative monetary policy to support a still fragile recovery, even as rising energy costs push inflation towards its 2% target. “If commodity prices push up inflation while wage growth remains sluggish, it would hurt household real income and corporate profits and hurt the economy,” BOJ Governor Haruhiko Kuroda said Tuesday. The path of monetary policy is less clear in Asia, where many economies are lagging behind their Western counterparts in lifting severe pandemic restrictions. For some central banks in the region, such as New Zealand, South Korea and Singapore, deep concerns about prices and imported inflation have already led to policy tightening. Australia’s chief central banker on Friday warned borrowers that it would be wise to prepare for a hike in rates this year as inflation will pick up. For most others in the region, the need for a fragile recovery is likely to complicate deliberations. Thailand’s central bank is unlikely to raise interest rates anytime soon, despite inflation hitting a 13-year high, as the war’s effect on tourism and trade slows growth.