Between pandemic and war, central banks seek their compass

Continue accommodative monetary policies or turn off the tap at the risk of slowing growth? After two years of uncertainty due to the pandemic, central banks continue to navigate without a compass in the face of the war in Ukraine and inflation.

“Until recently, central banks could not get involved in a post-COVID world at the risk of appearing too optimistic”, says William de Vijlder, chief economist at BNP Paribas. AND “the current situation is much more difficult”.

Vladimir Putin’s launched invasion of Ukraine and Western economic sanctions imposed against Russia have pushed up the prices of oil, gas, wheat and other raw materials, as well as aggravating difficulties in supply chains.

“The effects of the crisis in the short term are inflationary, but on growth it is more difficult to discern and this makes the task of central banks very difficult”, indicate the analysts of the American bank Wells Fargo.

This is particularly the case of the European Central Bank (ECB), with the war within the continent and the strong deterioration of economic relations with Russia.

“Before the war, the ECB was already trying to avoid damaging the economic recovery. indicates Gregory Clayes, an economist at the Belgian Bruegel Institute, noting that “The current situation makes things more complicated.”

Before the first bombs, the Frankfurt-based bank appeared poised to phase out government debt purchases this year and raise interest rates for the first time since 2011.

But the invasion of Ukraine complicates this prospect and may lead to a policy readjustment at Thursday’s meeting of its governing council.

The ECB “It was already moving at a different rate of exit from the pandemic” regarding the US Federal Reserve, says Neil Wilson of Markets.com. “The asymmetry with which the situation in Ukraine affects the United States and Europe will only widen this difference”.

Inflationary pressure in Latin America

The Fed still hasa series of raises” of interest rates after a first increase in March. Is “very early” to say if the war will change things, said its president Jerome Powell.

For the Fed”it is easier”, considers Gregory Clayes, because it enjoys strong growth, almost full employment and strong inflation linked more to internal demand than to the increase in energy prices, unlike Europe.

Central banks in many emerging countries, hit hard by commodity inflation and supply chain problems, have also increased their interest rates, although this may have an impact on the recovery.

The situation can be maintained because “the war in Ukraine will reinforce inflationary pressures in almost all emerging countries” and particularly in Latin America, said Shilan Shah, India economist at Capital Economics.

The Central Bank of Brazil raised its rates several times last year, up to 10.75%, although it weakened the country’s economic dynamism, whose growth estimate for this year stands at 0.3%.