The Telegraph, June 20, Barnabas Reynolds
For some time, the consensus view has been that central banks would keep interest rates at current ultra-low levels for as far as the eye could see. This has been the message from central banks themselves and it has been widely believed in the markets. But last week the Federal Reserve, the US central bank, shocked most observers by saying that it now expects to raise interest rates twice in 2023, thereby bringing forward the first increase in interest rates by at least a year. Should we now be anticipating a major shift in interest rate policy, not only in the US but also here?
Inflation holds the key. At the moment, central banks pretty much everywhere are sticking to the view that although inflation is going to rise, this can essentially be thought of as a one-off jump in the price level, largely in response to the lingering effects of the pandemic and the subsequent easing of lockdowns. Once this has washed through the system, they expect inflation to return to something like the 2pc that most central banks are targeting.
So much, so comfortable. But once inflation gets embedded in the economic system it proves devilishly difficult to wring it out again. Moreover, to take effective action, central banks have got to anticipate what is likely to happen and act early.
Yet the Federal Reserve had previously made it clear that it would not be taking anticipatory action on interest rates. Because inflation has undershot the 2pc target in recent years, it was prepared to allow a period when inflation overshot the target without bringing on a tightening of monetary policy. Last week’s announcement suggested a softening of this stance.
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