Global central bank chiefs say they should prioritize fighting inflation over growth

European Central Bank (ECB) President Christine Lagarde and US Federal Reserve Chairman Jerome Powell attend the European Central Bank Forum on Central Banking in Sintra, Portugal, June 29, 2022. European Central Bank / Posted via

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  • Powell: Lowering inflation would be painful, but necessary
  • Inflation risks stabilizing at higher levels
  • The European Central Bank is preparing to raise interest rates in September and July
  • BoE’s Bailey: Bigger political action is not on the table

CINTRA, Portugal, June 29 (Reuters) – The world’s top central bankers said on Wednesday that cutting high inflation around the world would be painful and could lead to a collapse in growth, but it must be done quickly to prevent rapid price growth from taking hold.

Inflation is breaking multi-decade highs around the world with soaring energy prices, post-pandemic supply chain bottlenecks and in some cases inflamed labor markets, driving up the cost of everything, and threatening to unleash hard-to-break wages—the price spiral.

“The process is likely to involve some pain, but the worst pain will be from the failure to address this high inflation and allow it to continue,” US Federal Reserve Chairman Jerome Powell said at the European Central Bank’s annual conference in Sintra, Portugal.

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Echoing Powell’s words, European Central Bank President Christine Lagarde said the low inflation of the pre-pandemic era would not return and that the ECB, which had consistently underestimated price growth, had to act now because price growth was likely to remain above 2% target. Next years.

Risks

A tightening of engineering policy to avoid a recession in the United States is certainly possible, Powell said, adding that the path is narrow and there are no guarantees of success.

“Is there a risk that we’re going too far? There is certainly a risk, but I don’t agree that it’s the biggest risk to the economy,” he said. “The biggest mistake we make, to put it this way, is to fail to restore price stability.”

Agustin Carstens, director general of the Bank for International Settlements, an umbrella group for central banks, said policymakers have taken the first step in recognizing they have a problem. Now their job was to tighten politics, with the stakes rising.

“They should try … to prevent a complete transition from a low inflation environment to a high inflation environment where this high inflation takes hold,” Karstens told the ECB meeting. “You need to prevent this vicious cycle from unfolding.”

The European Central Bank has already flagged interest rate hikes in both July and September while the Fed raised rates by 0.75 percentage points in June and may choose to take a similar move in July.

The Bank of England raised interest rates by 25 basis points to 1.25% this month – the fifth step in a row – and said it would act “more aggressively” in the future if it saw more persistent inflation.

“There will be circumstances in which we will have to do more,” Bank of England Governor Andrew Bailey said at the conference. “We are not there yet in terms of the next meeting. We are still a month away but this is on the table,” he added.

“But you shouldn’t assume it’s the only thing on the table,” he said, referring to another 25 basis point increase.

However, Bailey also cautioned that the British economy is now clearly at a turning point and is beginning to slow.

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Additional reporting by William Schomberg, Ann Safir, Howard Schneider and Lynsday Dunsmowice Editing by Gareth Jones

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