Omicron is an economic threat, but inflation is worse, central bankers say
NEW YORK (NYTIMES) – There is still a lot scientists do not know about omicron. There is cautious optimism – but no certainty – about the effectiveness of vaccines against this fast-spreading variant of the coronavirus, and experts do not fully understand what it means for public health or the economy.
But central banks have concluded that they don’t have the luxury of waiting to find out.
Facing surging inflation, three of the world’s most influential central banks – the Federal Reserve, Bank of England and European Central Bank – took decisive steps within 24 hours of each other to look past omicron’s economic uncertainty.
On Thursday (Dec 16), Britain’s central bank unexpectedly raised interest rates for the first time in more than three years as a way to curb inflation that has reached a 10-year high. The eurozone’s central bank confirmed it would stop purchases under a bond-buying programme in March. The day before, the Fed projected three interest rate increases next year and said it would accelerate the winding down of its own bond-buying programme.
The perception that the Bank of England would “view the outbreak of the omicron variant with greater concern than it actually did” caused the surprise in financial markets,” Philip Shaw, an economist at Investec in London, wrote in a note to clients. The Fed also “carried on regardless” with its tightening plans, he said.
Aside from Omicron, the central banks were running out of reasons to continue emergency levels of monetary stimulus designed to keep money flowing through financial markets and to keep lending to businesses and households robust throughout the pandemic. The drastic measures of the past two years had done the job – and then some: Inflation is at a nearly 40-year high in the United States; in the eurozone it is the highest since records began in 1997; and price rises in Britain have consistently exceeded expectations.
The heads of all three central banks have separately decided that the price gains won’t be as temporary as they once thought, as supply chains take a while to untangle and energy prices pick up again.
Andrew Bailey, governor of the Bank of England, said that policymakers in Britain were seeing things that could threaten inflation in the medium term. “So that’s why we have to act,” he said Thursday.
“We don’t know, of course, a lot about omicron at the moment,” he added. It could slow the economy, and already there are canceled holiday parties, fewer restaurant bookings, less retail foot traffic and signs that more people are staying home. But Omicron could also worsen inflationary pressures, he said. “And that’s, I’m afraid, a very important factor for us.”
Already, price gains have popped higher this year as snarled supply chains and goods shortages have raised shipping and manufacturing costs. Depending on the severity of Omicron and how governments react, the variant could cause factories to shut down and could keep supply chains in disarray and workers at home, prolonging goods and labor shortages and pushing inflation higher.
At the same time, policymakers are assuming the effect on the economy will be milder than previous waves of the virus. With each surge in cases and reintroduction of restrictions, the dent to the economy has gotten smaller and smaller. This would lessen the risk that the central banks end up tightening monetary policy into a downturn.
Still, it is an awkward balancing act. On the same day the Bank of England raised rates, its staff cut half a percentage point from their growth forecasts for the final three months of the year. By the end of 2021, the British economy will still be 1.5 per cent smaller than its pre-pandemic size, the bank estimated.
“From a macroeconomic perspective, it’s unlikely that the fourth wave is going to have as meaningful an impact as we’ve seen even during last winter,” said Dean Turner, an economist at UBS Global Wealth Management.
The economic recoveries from the pandemic, although bumpy, haven’t been derailed yet. Unemployment rates are falling in Europe and the United States, and businesses are complaining that it is difficult to hire staff. That, combined with the burst of inflation, was enough to bolster the case for some monetary tightening.
“There’s a lot of uncertainty with the new variant, and it’s not clear how big the effects would be on either inflation or growth or hiring,” Jerome Powell, the Fed chair, said Wednesday. But there is a “real risk” that inflation could be more persistent, he also said, which was part of the reason the bank sped up its plans to taper its bond purchases.
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