By Mike Dolan
As the global economy grapples with the aftermath of the COVID-19 pandemic and geopolitical tensions like the Ukraine invasion, central banks are facing a new challenge - volatile inflation without a corresponding impact on economic growth. This new normal of supply chain fragility may require central banks to adopt a more proactive and agile approach to monetary policy.
The rapid rise and fall of inflation rates in recent times have left policymakers, businesses, and financial markets on edge. The question on everyone's mind is whether we have narrowly escaped a major economic downturn or if we are simply back to square one.
In a recent speech, the Bank for International Settlements (BIS) highlighted the need for central banks to reevaluate their approach to supply shocks. The Deputy General Manager of BIS, Andrea Maechler, emphasized the need for central banks to be more cautious when dealing with supply disruptions that can have a significant impact on overall inflation.
Maechler pointed out that the steep supply curves and "Phillips Curve" dynamics in the post-pandemic world mean that even small disruptions can lead to sharp increases in prices. This, coupled with the current global landscape of de-globalization, geopolitical tensions, and climate change, necessitates a more forceful policy response from central banks.
While the recent fluctuations in inflation and interest rates may have not triggered a recession, Maechler suggested that central banks may need to take more aggressive action to ensure long-term inflation expectations remain stable. The current outlook suggests that the economy is resilient enough to weather these fluctuations, but the future remains uncertain.
Investors should brace themselves for a more volatile interest rate environment in the coming years. However, this could also present opportunities for growth in company earnings and equities if economies can adapt to the new normal of fluctuating prices and borrowing rates.
Overall, the post-pandemic era presents a unique set of challenges and opportunities for central banks, businesses, and investors. Adapting to this new reality will require a careful balance between managing short-term inflation risks and ensuring long-term economic stability.