Central Banks

Central banks are at risk of “a backward-looking response to inflation rather than a forward-looking response to growth”.

That’s a line from Blackrock. Former Bank of Canada policymaker and head of Blackrock’s investment institute Jean Boivin laments how central banks are now so far behind the curve that it’s become political.

Regarding the ECB, he said:

“The ECB is underwriting the hawkish rate hikes priced in markets even though it is unlikely to be able to deliver them. That speaks to the politics of inflation overriding the economics of inflation.”

I think that’s a natural consequence of global central banks missing this round of inflation so badly — of sticking to forward guidance and slow-rolling policy moves rather than taking their medicine and making a hawkish shift sooner.

That kind of shift would have taken some courage at this time last year or in late 2021 but they took the easier path.

What will be the courageous path in 2023 or late this year?

Given that a hard landing and recession is increasingly likely — particularly in Europe — that would be to pause rate hikes in anticipation of demand declining and bringing down inflation. But because central banks are so wounded — because their credibility is so strained — they will continue to slam on the brakes for too long.

The result may be central banks tightening too much and/or keeping rates high for too long. It’s a story of one mistake compounding another, leading to a dismal economic outcome.

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