The largest central banks in the world, ECB, Federal Reserve and Bank of Englandall three are meeting almost simultaneously this week and all three are likely to move forward with further rate hikes.

According to market estimates, the cost of borrowing will reach the highest level since the 2008 global financial crisis. Investors expect the US Federal Reserve at its meeting this week to slow down the pace of interest rate increases and limit their increase to 0.25 percent. points. Again, of course, dollar interest rates will be at their highest levels since 2007, when the global financial crisis began. The Bank of England and the ECB are expected to raise interest rates by half a percentage point, bringing sterling and euro interest rates to their highest levels since 2008 and the collapse of Lehman Brothers. In particular, for the ECB, a 50 basis point hike is considered absolutely certain, with market speculation focused on what its next step will be and whether it is going to take a new step at the second meeting of 2023, in March. .

Financial analysts note that the continued growth worries investors, who may have underestimated signs that inflation remains at a high level. So far, aggressive interest rate hikes have led to a partial de-escalation of inflationary pressures, but price increases remain alarmingly high, with US inflation at 6.5% and Eurozone inflation at 9.2%. After all, structural inflation, which rules out food and energy price volatility, remains elevated. The prevailing opinion in the markets is that inflation will gradually fall to the target level of 2%, adopted by both the ECB and the Bank of England. According to Reuters, the current situation will be the first serious test of the approach of central banks to monetary policy. It remains to be seen whether this approach will pay off once prices start to rise, and how well central banks will apply it if it further damages their economies.

By setting a specific inflation target, central banks believe they provide some credibility and encourage household and business planning to curb inflation and keep it within certain limits. Events seemed to confirm this belief, as the policy of setting specific inflation targets was carried over to all developed countries, from New Zealand in 1990 to Europe and the US and Japan in 2012 and 2013. pandemic in 2020, inflation actually remained under control. But this policy of theirs coincided with factors that helped, such as globalization, high technology and demographic changes. Since the start of the pandemic, and then with Russia’s invasion of Ukraine, the same forces seem to be pushing prices in the opposite direction. In short, this overall monetary policy framework is being tested as it faces a number of headwinds for the first time, as well as ongoing supply shocks that it may not be able to handle.

Almost all indicators show that high inflation expectations are overstated.

New setting

Speaking to Reuters, Claudio Borich, head of monetary and economics at the Bank for International Settlements, stresses that “in the future, we are likely to face a period of structurally higher inflation compared to the past two decades.” He points out that the shift to local production used to contain inflation, but now the impact of this shift tends to dissipate, while international trade, climate change and demographic changes are increasing inflationary pressures. In addition, there is a factor of society’s expectations of the development of the situation on the inflationary front. Inflationary expectations are often a kind of self-fulfilling prophecy as they lead to behavior that pushes prices up. And as Jennifer McKeon, lead economist at Capital Economics, points out, “Nearly all indicators show high inflation expectations well above pre-pandemic levels and imply price increases well above the 2% target of the major central banks.