Andrew, Christine, Kazuo and Kevin all share a problem. Prices are rising too fast in their countries, yet economic growth is vulnerable. What should they be doing? And which is the odd one out?
Sounds like a question in an old GCSE maths paper, doesn’t it? Well, don’t break out in long-repressed exam panic just yet – a test it isn’t. Rather, the line refers to the leaders of the world’s key central banks: Andrew Bailey of the Bank of England; Christine Lagarde of the European Central Bank; Kazuo Ueda of the Bank of Japan; and last and certainly not least, Kevin Warsh of the US Federal Reserve.
All face stubborn inflationary pressures in their economies, with citizens struggling to afford the cost of living and increasingly angry. The traditional response would be to raise interest rates: make it more expensive to borrow money, and in turn consumer spending, business investment and hiring all fall. This reduces spending power in the economy and so price increases slow down.
Yet each of these economies is also contending with weak expansion (with the exception of the US, which has growth, just very reliant on the AI investment boom). The traditional remedy here is to cut interest rates, helping growth by making it easier to borrow and spend.
This is the central dilemma with which the world’s central banks have been wrestling ever since the end of the pandemic, more or less. What is to be done when the two key features of your job point in two different directions? It’s like asking a fireman to put out the blaze ravaging your home – but not to get anything wet.
Either way, the bankers had decisions to make at their latest meetings in recent days. Christine decided to raise rates. Kazuo decided to raise rates. Kevin decided to raise rates.
Andrew decided not to. The odd one out.
On the evidence, it wasn’t even clear that he even fully agreed with himself. In the Bank of England’s published minutes explaining the decision, Bailey wrote:
There has been a material increase in energy prices since July, with a consequent effect on the near-term inflation outlook. The risk for energy prices, and thus inflation, continues to be on the upside… if the conflict in the Middle East persists for an extended period, as appears to be the case, and the risk of [knock-on] effects emerging increases, it is likely that [rates will have to be raised].
The Bank is on record as expecting UK inflation to accelerate from the current 3.1% to “slightly above 4%” by early next year. Yet the persistent weakness in the job market has clearly concerned members enough to refrain from joining their global colleagues in making a renewed push to get on top of inflation now.
It’s a very difficult place for a policymaker to be – whether in exam question scenario or reality. With the Budget looming on the horizon too, we continue to believe global markets other than the UK present more attractive opportunities.
