The Econmist - USA (2021-11-06)

TheEconomistNovember6th 2021 Finance&economics 65

OnOctober27ththeBankofCanadaan­
nounced the end of its bond­buying
scheme(thoughitwillstillreinvestthe
proceedsofmaturingsecurities).Thebond
markethadalreadyreachedthesamecon­
clusionbeforetheannouncement,andis
pricingina smallinterest­rateincreaseov­
erthenextyear.Investors’expectationsfor
raterisesinBritainhaveratchetedupdra­
matically(seechart).Aswewrotethis,the
BankofEnglandwasduetodecidewhether
toraiseitspolicyrate.
Such moves have been mirrored in
America andthe euro area, albeit ona
smaller scale. The Federal Reserve an­
nounceda taperingofitsassetpurchases
onNovember3rd.Thathadbeenwidelyex­
pected,butthemoveindex,whichtracks
thevolatilityofAmerican interestrates,
hasthismonthhititshighestlevelsince
theearlydaysofthepandemic.OnOctober
28thChristine Lagarde, the head ofthe
European Central Bank, pressed back
againstmarketexpectationsthatinterest­
rateincreasescouldbeginassoonasthe
secondhalfof2022,notingthatanearly
risewouldbeinconsistentwiththebank’s
guidance.Thatfailedtostoptwo­yearGer­
manbond yieldsinchingupthedayafter,
totheirhighestlevelsinceJanuary2020.
The movements sofar are notlarge
enoughtoconstitutea bond­markettan­
trumonthescaleofthatseenin2013,when
theFedalsoannounceda taper.Butthefact
thatthemoodismuchmorefebrilethanit
hasbeenformostofthisyearreflectsthe
uncertainty over theeconomic outlook,
particularlythatforinflation.
Whetherthemarketsprovetoberight
on the timing of interest­rate rises or
whethercentralbankersinsteadkeeptheir
originalpromiseswilldependonhowper­
sistentinflationlookslikelytobe.Central
bankershavesaidthatpricerisessofarare
transient, reflecting an intense supply
crunch.Butsomeonlookersbelievethata
newinflationaryeramaybeontheway,in
whichmorepowerfulworkersandfaster

wagegrowthplacesustainedpressureon

prices.“Insteadofdecadesinwhichlabour

hasbeencomingoutofpeople’searsit’s

goingtobequitehardtofindit,andthat’s

going to raise bargaining power,” says

CharlesGoodhart,aformerrate­setterat

theBankofEngland.

Recentmovesalsohighlightthesome­

times­complex relationship between fi­

nancialmarketsandmonetarypolicy.In

normal times centralbankers setshort­

terminterestrates,andmarketstrytofore­

castwherethoseratescouldgo.Butbond

marketsmight alsocontaininformation

oninvestors’expectationsabouttheecon­

omyandinflation,whichcentralbankers,

fortheirpart,trytoparse.BenBernanke,a

formerchairmanoftheFed,oncereferred

totheriskofa “hallofmirrors”dynamic,in

which policymakersfeeltheneed tore­

spondtorisingbondyields,whileyieldsin

turnrespondtocentralbanks’actions.

Allthis makes central bankers’lives

evenharderastheytrytopenetratea fogof

economicuncertainty.Yetthereissome

small relief to be had,too. If investors

thoughtinflationhadbecomesustained,

instead ofbeingdriven largelyby com­

modity prices and supply­chain snarls,

yields onlong­dated government bonds

wouldhavebeguntomovesignificantly.So

far,however,investorshavedraggedinter­

est­rateincreasesforwardratherthanbak­

ing in the expectation of permanently

tighter monetary policy. The ten­year

AmericanTreasuryyield,forinstance,is

stillnotbacktoitsrecenthighsinMarch.

Furthermore,somebondmarkets are

stillcalm.InJapan,consumerpriceswere

just0.2%higherinSeptemberthana year

ago,andarestillindeflationaryterritory

onceenergyandfreshfoodarestripped

out.TheBankofJapan’syield­curve­con­

trolpolicyremainsinplace,contrasting

withthecollapseinAustralia.Settingpoli­

cyisa littleeasierwheninvestorsaremore

certainoftheoutlook.That,sadly,isnota

luxurymanycentralbankershave.n

Higher, faster, stronger

Source:Bloomberg

1.0

0.8

0.6

0.4

0.2

0

2021

May JulJun Aug OctSep Nov

Two-yeargovernment-bondyields,%

1.00

0.75

0.50

0.25

0

-0.25

-0.50

2021 2022

OSAJJMAMFJDNOS

Market expectations of main central-bank

interest rates, %

Novth 2021

Sep1st 2021

Expectations on:

USFederalReserve

Bank of England

European Central Bank

Canada

Australia

United States

Britain

Emergingmarkets

Living the high life

I

n recent monthsthe  world  economy

has  come  to  resemble  a  badly  micro­

waved  dinner:  generally  hot,  but  with

some  bits  merely  lukewarm  and  others

positively  scorching.  Consumer  prices

globally are likely to rise by 4.8% this year,

according  to  theimf,  which  would  be  the

fastest increase since 2007. But price rises

in emerging markets are running ahead of

those in the rich world, and a few unfortu­

nates,  such  as  Argentina,  Brazil  and  Tur­

key, are feeling particular pain. Their expe­

rience helps illustrate how and when infla­

tion can get out of hand. 

Although  inflation  rates  in  emerging

markets  tend  to  be  higher  and  more  vola­

tile  than  those  in  advanced  economies,

they  did  generally  decline  between  the

1970s and the 2010s, much like those in the

rich  world.  The  median  inflation  rate

among  emerging  economies  fell  from

10.6% in 1995 to 5.4% in 2005 and 2.7% in

2015,  thanks  to  efficiency­boosting  devel­

opments  like  globalisation  and  improved

macroeconomic  policymaking.  The  imf

expects  consumer  prices  in  emerging

economies to rise by 5.8% this year, which

is not a huge departure from recent trends;

prices rose at a similar pace as recently as

2012.  But  some  economies  have  strayed
      well  above  the  mean.  Inflation  stands  at
      10.2% in Brazil, 19.9% in Turkey, and 52.5%
      in Argentina.
      Such  high  inflation  reflects  more  than
      soaring  food  and  energy  prices.  In  ad­
      vanced  economies  and  many  emerging
      ones, a jump in prices usually triggers a re­
      straining  response  from  the  central  bank.
      That response is more powerful when cen­
      tral  banks  are  credible,  say  because  infla­
      tion has been low in the past, and the fiscal
      picture benign. Then people behave as if a
      price  spike  will  not  last—by  moderating
      wage  demands,  for  instance—which  re­
      duces inflationary pressure.
      This  happy  state  can  be  disturbed  in  a
      number of ways. Compromising the inde­
      pendence of the central bank is sometimes
      enough  to  make  the  temperature  rise.  Re­
      cep  Tayyip  Erdogan,  Turkey’s  president,
      has declared himself an enemy of interest
      earnings  and  leant  on  the  central  bank  to
      reduce its benchmark rate, a step he claims
      will  bring  down  inflation.  Over  the  years
      he has sacked a number of central­bank of­
      ficials, most recently three members of the
      bank’s  monetary­policy  committee  in  Oc­
      tober. Such antics have contributed to cap­

Cautionary tales from high-inflation

economies