(Bloomberg) -- Central bankers from around the advanced world warned against complacency about the fading of the global inflation shock, saying they’ll keep raising interest rates to ensure their job is done.
Amid a collective sigh of relief among the business and political elite in Davos, monetary officials there and elsewhere cautioned that falling headline consumer-price gauges might yet prove a false dawn. They cited threats ranging from China’s reopening to resurgent wages.
“‘Stay the course’ is my mantra,” European Central Bank President Christine Lagarde told the World Economic Forum on Friday, while her Swiss counterpart Thomas Jordan said “we should not underestimate the second-round effects that are already on the way.”
Over in the US, Federal Reserve Vice Chair Lael Brainard reminded investors that “inflation remains high, and policy will need to be sufficiently restrictive for some time.” Her New York colleague John Williams added that “monetary policy still has more work to do.”
The central bankers’ admonishments and words of determination about rate hiking sought to quell a sense of burgeoning optimism in global markets after half a year of consistently slowing headline inflation in the US, with the euro zone following albeit with a lag.
The sentiment that the consumer-price scare that blighted 2022 in the wake of Russia’s invasion of Ukraine may be convincingly abating was evident in what Morgan Stanley Chief Executive Officer James Gorman described as the “echo chamber” of Davos.
“There’s clear evidence inflation has in fact peaked and is coming down, right?” he told Bloomberg Television’s Lisa Abramowicz and David Westin on Thursday. “How quickly, whether the Fed will get us to 2%, and when remains the debate. But the slope of the line is to everybody’s favor.”
Early in the week, Bank of Portugal Governor Mario Centeno described a more benign picture than before of slowing US consumer-price gains, and a lack of wage pressures in Europe.
As Friday dawned, Davide Serra, CEO of Algebris UK Ltd., observed that “because inflation has peaked de facto between September and November, people are kind of feeling a sense of relief.”
Even so, the chorus of monetary officials trying to instill caution and warning about how rates will respond grew increasingly louder as the Davos event drew to a close and attendees prepared for a weekend on the ski slopes.
The impact on global commodity prices of China’s reopening from pandemic lockdowns was their biggest worry, one that Serra also acknowledged.
“What impact it will have on all of us in terms of added demand addressed to the global economy is something that will be a positive for China, most likely will be a positive to the rest of the world, but will have inflation pressure on many of us,” Lagarde said.
Her refocused pledge to keep tightening followed news days earlier from officials with knowledge of their discussions that euro-zone policymakers are starting to consider a slower pace of rate hikes than she had previously indicated.
Sitting on the same panel, International Monetary Fund Managing Director Kristalina Georgieva expressed similar sentiments on the price threats posed by China’s thaw.
“We don’t know quite yet how inflation would march downwards,” she said. “What if the good news of China growing faster translates into oil and gas prices jumping up, putting pressure on inflation?”
While the Fed officials declined to specify a preference for the US central bank’s next decision on Feb. 1, they did warn that their rate hiking is clearly not finished.
“What’s important here is not what happens at each meeting but I think we’ve still got a ways to go,” said Williams. “This is a period where we’re getting a lot of new information.”
One such example was provided by Jordan of the Swiss National Bank, who said that his officials had noticed companies are now far more open to charging customers more. He highlighted wage pressures as another worry, and told Bloomberg Television’s Francine Lacqua on Thursday that more tightening “is in the cards.”
“What we see everywhere, also in Switzerland, is a little bit a change in the way firms are dealing with price increases,” he said on Friday to Davos attendees. “They do not hesitate anymore.”
Adding to the list of potential risks, former US Treasury Secretary Lawrence Summers cited one as “a resurgence of inflation because off a loss of credibility.”
In Japan, where the central bank this week resisted the global trend to tighten monetary policy amid Governor Haruhiko Kuroda’s concern that underlying prices are too weak, there’s still some sense of pipeline pressure coming.
“We expect wages to accelerate, to grow, and that would eventually make the 2% target met in a sustainable manner,” he told the same Davos audience.
With the Fed and ECB approaching their initial decisions of 2023 still in an aggressive mode of interest-rate hiking, Serra of Algebris cautioned that the determination to quell consumer prices may prove excessive.
“In a world with so much debt, some inflation might be useful,” he told Bloomberg TV, adding that tightening will bring rates significantly higher. “Certainly the Fed is going to lead us to 5%, 5.5%, the ECB at least to 3%, maybe 3.5% but then after that, it will end up being too restrictive.”
That worry wasn’t openly shared by many of the central bankers. Capturing the tone of several of them, Summers — a paid contributor to Bloomberg TV — insisted that the real risk is giving up too early in the fight to bring inflation under control.
“Relief must not become complacency,” he declared. “The last part of the journey is often the hardest, and that’s true with respect with a return to the inflation target.”
--With assistance from Jana Randow, Alexander Weber, William Horobin, Toru Fujioka and James Regan.
©2023 Bloomberg L.P.
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