Between the pandemic and the war in Ukraine, central bankers are looking for their compass

Posted 08 March, 2022

Continue with ultra-accommodating policies or close the tap at the risk of stifling growth? Faced with the economic vagueness imposed by the war in Ukraine and the surge in inflation, central bankers are navigating on sight after two years of pandemics full of uncertainty.

“Until recently, central banks could already not engage in a post-covid world at the risk of appearing too optimistic”, reminds AFP William de Vijlder, chief economist of BNP Paribas.

"The situation today is much more difficult," he said.

Vladimir Putin's assaults on Ukraine and economic sanctions imposed by the West have led to soaring prices for oil, gas, wheat, and many commodities in recent days, as well as worsening difficulties in supply chains, the consequences of which are difficult to measure today.

“The effects of the crisis in the short term are inflationary, but on growth, it is more difficult to identify and this makes the task of central bankers very difficult”, note analysts from the American bank Wells Fargo.

This is particularly the case for the European Central Bank at a time when war is knocking at the continent's borders, jeopardizing the strong economic relationship with Moscow and driving up the prices of the energy on which households and businesses depend.

“Before the war, the ECB was already trying to avoid breaking the economic recovery,” recalls Gregory Clayes, the economist at the Brussels Bruegel Institute, stressing that “the current situation is complicating things even more”.


First since 2011


Before the first bombs, the Frankfurt institution seemed ready to gradually stop its purchases of public debt this year, then to raise interest rates for the first time since 2011.

The invasion of Ukraine complicates this prospect and could lead to an adjustment of the response to the crisis on Thursday during a meeting of the Board of Governors.

Faced with the American central bank, the ECB "was already in a different pace of exit from the pandemic" of Covid-19, notes Neil Wilson, an analyst for "The asymmetry with which the situation in Ukraine affects the United States and Europe will only magnify this difference."

Because on the American side, the Federal Reserve is still betting on “a series of increases” in interest rates in the wake of the first increase in March, its president Jerome Powell said on Thursday. According to him, it is "too early" to say whether the war will change things.

"It's easier" for the Fed, judge Gregory Clayes because it enjoys strong growth, almost full employment, and high inflation-linked more to demand from Americans than to the rise energy prices, unlike Europe.

In addition, "the rise in wages is more evident in the United States than in Europe", recalls William de Vijlder, and could fuel the rise in prices, already at their highest for forty years.

Faced with inflation at its highest for thirty years and the fear of seeing wage increases accelerate it, the Bank of England has already raised its rates twice, now at 0.5%.

The central banks of many emerging countries, heavily affected since last year by the disruption of supply chains and the explosion in the prices of certain raw materials, have also increased their interest rates, at the risk of breaking the reprise.

The situation could continue, thinks Shilan Shah, senior economist for India at Capital Economics: "the war in Ukraine will reinforce inflationary pressures in almost all emerging countries", and particularly in Latin America, he says in a note.

The Brazilian Central Bank, for example, raised its rates several times last year, up to 10.75%, weakening the momentum of the country whose growth is expected at 0.3% this year.

Subject to very low inflation for years, Japan is one of the few major countries to maintain an ultra-accommodative policy, still not achieving its inflation targets: prices are expected to stagnate for 2021/22 and the inflation to reach 1.1% in 2023/24, according to forecasts by the Bank of Japan.


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