The leaders of the world’s most powerful central banks have warned that the global economy is facing a new period of persistently high inflation, unleashed by the coronavirus pandemic after decades of stability.
The heads of the US Federal Reserve, European Central Bank and the Bank of England said the era of low and stable inflation across advanced economic since the 1990s was unlikely to return amid a succession of shocks.
Christine Lagarde, the head of the ECB, said there were “forces that have been unleashed” by the Covid pandemic, Russia’s war in Ukraine and the breakdown of global supply chains that made the return to a world of low and stable inflation difficult to achieve .
“I don’t think that we’re going to go back to that environment of low inflation,” she said.
Speaking on a panel at the ECB’s annual policy forum in Sintra, Portugal, she said: “A lot of the movements we’ve experienced in the last 20 years were predicated on globalisation – on the breaking down of supply chains, on the reduction of cost, on just-in-time. That has changed. And will probably change continuously towards a system we’re not certain about.”
Lagarde was joined on the panel by Jerome Powell, the chair of the US Fed, Andrew Bailey, the governor of the Bank of England, and Agustín Carstens, the head of the Bank for International Settlements.
Powell said the post-pandemic economy was being driven by “very different forces” to the past decade. “What we don’t know is whether we’ll be going back to something that looks more like, or a little bit like, what we had before. We suspect it will be kind of a blend.”
The Fed chair said it was raising interest rates with the express purpose of moderating the pace of growth in the world’s largest economy, as it attempts to deal with the fallout from severe supply bottlenecks and red-hot demand for goods and services driving up inflation.
“The aim of that is to slow growth down so that supply will have a chance to catch up. We hope that growth will remain positive,” he said.
Bailey said Covid had left a “structural legacy” in the UK jobs market, where companies have struggled with a lack of workers, while inflation would also be influenced by the remaking of international supply chains in response to geopolitical tensions and to deal with global heating .
Together representing more than a third of the world economy, and with more than $20tn (£16.5tn) of assets on their balance sheets, the central bank chiefs put borrowers on notice for aggressive rises in interest rates to combat soaring inflation.
Powell said it was the job of central banks to prevent a permanent transition to a “higher-inflation regime” after a string of shocks. “There’s a clock running here,” he said.
Although warning there were signs of slowing economic growth in Britain, Bailey did not rule out raising rates by 50 basis points at the Bank’s next meeting in August and said it had the option of taking forceful action. “We’re not there yet in terms of next meeting. But that’s on the table. But you shouldn’t assume it’s the only thing on the table,” he said.
Giving evidence separately to the Commons Treasury committee, the economist Swati Dhingra, who joins the Bank’s nine-strong monetary policy committee (MPC) later this year, said that the worsening outlook for growth had convinced her that a “gradual approach” to interest rates rises was needed.
At a hearing with MPs on the Treasury select committee to approve her appointment, the London School of Economics economist said she had been prepared to take a more aggressive approach to rate hikes until she saw the latest consumer confidence figures, which showed the largest decline in optimism on record.
“In hindsight I think there is some room for a gradual approach,” she said. Three members of the MPC voted for a 0.5 percentage point rate rise in the central bank’s base rate to 1.5% at a meeting earlier this month while the majority backed a more modest 0.25 point increase.