Top central bankers expect more rate hikes amid stubborn inflation

Top central bankers expect more rate hikes amid stubborn inflation

Central bankers from the world’s leading economies said on Wednesday that although they raised interest rates significantly, additional increases would be needed to bring inflation under control given the strength of labor markets.

Federal Reserve Chairman Jerome H. Powell said, “Although policy is restrictive, it cannot be restrictive enough, and it has not been restrictive for long.”

Speaking at the European Central Bank’s 10th annual conference in Sintra, Portugal, Mr Powell said the strong labor market was “pulling the economy” and was a key reason Fed officials forecast two additional rate hikes this year .

As American workers get promoted and earn higher wages, it is helping to increase demand, which is allowing the economy to grow and giving companies the continued ability to raise prices.

This month, the Fed broke a 10-meeting streak of hikes by holding rates steady in the 5 percent to 5.25 percent range. But Mr. Powell said on Wednesday that the decision was no indication about the frequency of future steps. Skipping June may not mean that the new norm is to raise rates at every other meeting.

“The only thing we decided was not to raise rates at the June meeting,” Mr. Powell said. “I will not step away from the table in frequent meetings at all.”

Speaking on the same panel, European Central Bank President Christine Lagarde and Bank of England Governor Andrew Bailey said tight labor markets in their economies were also pushing up wages and adding to inflationary pressures.

“We still have ground to cover,” Ms Lagarde said, reiterating that the ECB, which raised rates by a quarter point in June, would likely raise interest rates again in July.

Central bankers from around the world, from Canada to South Africa, gathered at Sintra to discuss monetary policy at a moment of global inflation. Although inflation has eased somewhat in major economies such as the United States and Europe, policymakers spent most of the meeting discussing the risks they face in declaring victory because of opacity about some of the inflation factors. There is a large amount of uncertainty due to Energy markets question how companies will respond to rising labor costs.

After a year or so of aggressively raising interest rates in the United States, Britain and European countries that use the euro, central bankers’ actions have changed drastically over the past month. The Fed held interest rates steady, the European Central Bank raised interest rates by a quarter point with signs of more to come, and the Bank of England unexpectedly raised rates by half a percentage point.

The Bank of Japan takes a different stance and has adopted very loose monetary policy even as inflation in that country has reached its highest level in four decades.

Kazuo Ueda, the governor of the Bank of Japan, began his term as governor in April. Speaking on the panel, Mr. Ueda said that while the core rate of inflation was above 3 percent, Japanese officials thought the underlying measure of inflation was still slightly below the 2 percent target. “So we are keeping the policy unchanged,” he said.

In Europe and the United States, headline inflation has been declining this year, but that has brought only limited respite to policy makers. They all share the same challenge: how to get inflation to the 2 percent target, amid indications that domestic inflationary pressures from wage growth in the services sector remain strong.

In the United States, in the labor-intensive services sector like hotels, restaurants, financial services, Mr Powell said on inflation, “that’s where we’re not seeing a lot of progress yet”. “The authorities need to see more softening of labor market conditions,” he added. He does not expect core inflation to drop below 2 percent until 2025.

Mr. Powell emphasized that many officials expect “two or more” additional rate hikes in 2023 as of their June meeting.

In the eurozone, Ms Lagarde said on Wednesday, “we don’t see enough concrete evidence that underlying inflation, in particular domestic prices, is stabilizing and coming down.” And so, policymakers want to make sure they keep interest rates restrictive for long enough to ensure that inflation stays low.

In Britain, “it’s the core – that’s the issue,” Mr Bailey said. It has been “very sticky,” he added, because the labor market has been tight, partly because the workforce is still smaller than it was before the pandemic.

Mr. Bailey said investors expected the bank to raise rates a few more times, but without dismissing or acknowledging those forecasts, he simply said, “We’ll see.”

Measures of core inflation, which exclude food and energy, and measures of services inflation, which are heavily influenced by firms’ wage costs, are still uncomfortably high. In Britain, core inflation rose to 7.1 percent last month, compared to 5.3 percent in both the United States and the eurozone.

“Despite all the differences between them, they share the general view that they are preparing for the next phase of the inflationary process,” said Frederic Ducrozet, head of macroeconomic research at Pictet Wealth Management, where headline inflation is coming down. Yes but not the original.

Policymakers are also closely watching how fast the effects of higher interest rates are taking effect on their economies, as a way of determining how effective monetary policy has been. Mr Bailey said that in Britain, the shift from convertible to fixed-term mortgages had slowed the transmission of monetary policy. “History won’t be a great guide,” he said. A similar, but less uniform, change has taken place in the eurozone, Ms Lagarde said.

More recently, the Bank for International Settlements warned that despite a decline in the inflation rate, “the last mile of travel may prove difficult.”

Inflation may prove to be more stubborn than expected as workers are demanding higher wages to make up for the purchasing power lost in the last year or two. But companies can choose to pass those extra labor costs onto customers. “In this scenario, inflation could remain uncomfortably high,” the bank’s report said. That concern was reiterated by Ms. Lagarde on Tuesday.

Mr. Powell and Ms. Lagarde both said it was possible they would be able to root out inflation without causing a recession, though analysts expect their efforts to lead to a recession.

“Our baseline does not include a recession,” Ms Lagarde said. “But that’s part of the risk out there.”

jenna smialek Contributed reporting.

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