The Bank of England has become the latest central bank to suggest it's poised to accelerate its tightening of monetary policy. After years of keeping their feet firmly on the loud pedal, policymakers everywhere are now stamping on the brakes. There's a growing danger that they'll crash their economies into recession — a risk they seem willing to take as representing the lesser of two evils.
The UK central bank on Thursday raised its benchmark interest rate by 25 basis points, lifting the official rate to 1.25% from 0.1% in December. It follows the Federal Reserve decision Wednesday to lift its target rate by 75 basis points, its biggest uplift since 1994 after previously signalling a 50 basis-point move, and the Swiss National Bank's surprise decision this week to boost borrowing costs for the first time in 15 years.
All around the world, the guardians of monetary stability are belatedly trying to curb consumer-price increases that are running at quadruple their targets in many jurisdictions.
The BOE suggested it's preparing to join its peers in implementing bigger moves if inflation continues to surprise on the upside, saying "it would be particularly alert to indications of more persistent inflationary pressures, and would if necessary act forcefully in response."
Fed Chair Jerome Powell said this week that his "overarching message" was the need to halt runaway prices, implicitly acknowledging that achieving that goal may come at the expense of both growth and employment.
Policy makers are downgrading their growth forecasts and simultaneously upgrading their inflation predictions, raising the prospect of stagflation afflicting large parts of the global economy in the coming quarters. The risks in the UK are particularly acute, with the government raising taxes at the same time as wage growth remains lacklustre, resulting in the biggest drop in living standards in at least two decades.
It's little wonder that economists surveyed by Bloomberg News have been steadily shortening the odds of a UK recession. They now see a 35% chance of the economy contracting, the highest in a year.
The Bank of England deserves some credit for starting to raise interest rates in December, ahead of many of its peers. But it remains guilty of skipping the opportunity to tighten policy a month earlier when an increase that traders and investors thought was baked in for November failed to materialise.
Policy makers everywhere spent too long arguing that price pressures would prove transitory. By going harder on rates now, they're effectively conceding that they've fallen well behind the curve. If only they'd slowed when inflation was flashing amber in the distance, rather than waiting for the red lights.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
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