The European Central Bank (ECB) headquarters in Frankfurt. Many central banks are starting to withdraw the emergency stimulus they introduced to fend off last year’s pandemic recession. Image Credit: Bloomberg

Washington: Many central banks are starting to withdraw the emergency stimulus they introduced to fend off last year’s pandemic recession.

With inflation accelerating, the Federal Reserve is set to slow its asset-purchase programme, while peers in Norway, Brazil, Mexico, South Korea and New Zealand are among those to have already raised interest rates.

Behind the shift are signs that the recent inflation scare won’t fade soon amid supply chain strains, surging commodity prices, post-lockdown demand, ongoing stimulus and labor shortages.

Complicating the task for policy makers is that growth may be slowing, prompting some to warn of a stagflationary-lite environment.

That puts central bankers in a bind as they debate which risk they should prioritize. Targeting inflation with tighter monetary policy adds to the pressure on economies, but trying to boost demand may ignite prices further.

Stagflation on the horizon?

For now, the feeling of many is that inflation has lingered longer than most predicted. As Huw Pill, the Bank of England’s new chief economist, said last week, the “balance of risks is currently shifting towards great concerns about the inflation outlook, as the current strength of inflation looks set to prove more long-lasting than originally anticipated.”

Not all are as concerned or looking to change tack. Officials at the European Central Bank and Bank of Japan are among those intending to keep stimulating their economies aggressively. And the International Monetary Fund predicts that in advanced economies at least, inflation will soon ease to about 2%.

“Stagflation is too strong a word. Still, supply shocks that lift prices and lower output leave monetary policy makers with no easy options. With little urgency to act, the Fed and other major central banks are preserving optionality. If stubborn inflation forces their hand, the global recovery will face an additional drag,” said Tom Orlik, chief economist at Bloomberg Economics.

Here is Bloomberg’s quarterly guide to 23 of the world’s top central banks, covering 90% of the world economy:

US Fed

Jerome Powell, the Federal Reserve chairman has recently taken a step toward scaling back massive pandemic support.

The Fed chair last month said the US central bank could start to taper monthly bond purchases as soon as November. Getting that started is top of his to-do list, alongside persuading Americans that the Fed is also keeping an eye on higher-than-expected inflation.

He’ll try to communicate that message without giving the impression that the Fed is getting closer to raising near-zero interest rates, even though policy makers were evenly split on rate liftoff next year, according to quarterly projections they released Sept. 22.

But the forecasts - displayed as anonymous dots on a chart - can be affected by shifts in personnel. In addition to Powell’s chairmanship, President Joe Biden has the chance to pick three other governors on the seven-seat Board in Washington.

European Central Bank

The ECB is preparing for a major policy update in December, when projections through 2024 will show how much progress inflation is set to make toward sustainably reaching a newly set 2% goal. Global supply bottlenecks and a series of one-time factors have pushed price growth far above that rate, though pressures are expected to ease over the course of next year.

Policy makers led by President Christine Lagarde have already decided to slow purchases under their 1.85 trillion-euro ($2.2 trillion) pandemic program in the fourth quarter, and are likely to allow the plan to expire in March. A debate in coming months about how to redesign the ECB’s older bond-buying scheme may prove more contentious, with some advocating more flexibility and an increase in pace that others say may not be needed.

Bank of Japan

BOJ Governor Haruhiko Kuroda must now work with a new prime minister, Fumio Kishida, to guide the economy out of the pandemic. The BOJ could decide this quarter to extend its Covid funding measures or wrap them up by the end of March, as planned. The policy board will be watching to see if the recovery benefits from a release of pent-up demand after restrictions on activity were finally lifted last month, and as vaccination rates rise.

Still, inflation that’s forecast to stay below target for years means the bank is unlikely to let up on its main stimulus any time soon, even as peers move toward normalization. That divergence should keep the yen weak, providing a tailwind for Japan’s export-led recovery.

Bank of England

With UK inflation on course to hit more than double the BOE’s 2% target by the end of the year, speculation is mounting the institution will be the among the first of its G-7 peers to start unwinding pandemic-era rate cuts.While officials said in September that they didn’t necessarily have to wait until their bond-buying plan finishes at the end of this year to act, most economists are penciling in the first move in for 2022. Markets are even more aggressive, and at one stage were predicting three increases next year.Still, concerns that a premature tightening would choke off the recovery may yet stay the BOE’s hand, especially as U.K. consumers prepare for a difficult winter of mounting bills.