What will central banks do next?

About a year into their bare-knuckle brawl against inflation, the world’s central banks have found themselves in the middle of the least fun game of ‘would you rather’ ever. 

Driving the news: Central bankers across the world are making like degenerate gamblers and hammering the over on inflation, prepping for further interest rate hikes as they bet prices will stay elevated even as red-hot food and energy costs have cooled, per The WSJ.

  • The Bank of Canada is expected to hike again next month. The European Central Bank all but confirmed it would. The Bank of England is likely to follow suit this week. And, after a brief pause, the US Federal Reserve is set to get right back to hiking. 

Inflation has been sticky, partly due to high wage growth and resilient spending, creating a fear that households have adjusted to a new world of soaring prices, one banker told The Wall Street Journal. It might require ultra-high interest rates to shock the economy out of it. 

Yes, but: Central banks are getting mixed signals that suggest they’ve hiked rates sufficiently, and just need to be more patient. Global GDP growth is tepid at best—the eurozone slipped into a recession this month—and it’s possible that consumers who keep spending haven’t burnt through their pandemic savings yet.

Why it matters: If central banks make the wrong call between hiking rates further or holding them steady they could either A) drag the developed world into a recession or B) bring about years of inflation well above target rates. Both undesirable outcomes, in our opinion.—QH