Is one too hot, another too cold, and the third just right? I found this editorial in the Wall Street Journal interesting and informative:
The Bank of England is the most hawkish, increasing its benchmark interest rate to 0.25% from 0.1%. It will maintain at £895 billion ($1.2 trillion) the stock of government and corporate bonds it has bought over the years under quantitative easing, but it had already stopped new purchases last year. Investors had thought (or hoped) the omicron Covid variant might derail the BoE’s plans, but Governor Andrew Bailey thinks inflation is the bigger worry.
Not so in Frankfurt, where the European Central Bank is the most dovish. President Christine Lagarde will phase out the pandemic-linked QE program next year, by which point the central bank will have accumulated nearly €1.85 trillion ($2.1 trillion) in assets. But the ECB will extend, apparently indefinitely, the pre-pandemic QE program once purchases taper to €20 billion a month later next year. The ECB’s negative policy rate, of minus-0.5%, will linger until QE ends (if it ever does).
Compared to these two, Fed Chairman Jerome Powell is trying to split the baby. He announced Wednesday an accelerated taper of pandemic QE while talking up future rate increases that may or may not ever happen.
The message is that each major monetary area is on its own, though a conspicuous feature of the current inflation is that it’s everywhere. The Fed is facing consumer-price increases of nearly 7%. Inflation in Britain hit 5.1% in November, the highest in a decade. Eurozone inflation overall was 4.9% in November, and as high as 6% in Germany and 5.6% in the Netherlands.
The lack of a coordinated response to a common problem will make it harder to control mounting economic risks. One worry is exchange rates. The British pound gained as much as 0.7% versus the dollar after Mr. Bailey’s rate announcement, presumably due to global investors chasing higher returns. The euro’s counterintuitive 0.4% appreciation versus the dollar Thursday may result from investors’ view that “only†€20 billion in monthly QE is hawkish—which shows how warped perceptions have become.
I would say that my own view is congruent with the editors’ although not identical to it. I think that, although the United Kingdom, the European Union, and the United States all face inflation they have very different situations and would have great difficulty in formulating any “coordinated response” that would satisfy all of them. Furthermore, I’m skeptical that the central banks can exert the kind of influence on their home economies as they did in the 1980s. We’re much more globalized now than then and Russia, China, and who knows how many other countries may have veto power.
