War in Ukraine and a slowdown in China’s economy linked to COVID-19 lockdowns have introduced fresh complications for central banks trying to gently tighten monetary policy without causing a recession, Capital Economics has warned.
Federal Reserve chairman Jerome Powell says the central bank will move “expeditiously” to fight inflation.The hope for a soft landing from the record levels of monetary stimulus and rock-bottom interest rates in developed economies around the world has now become an even harder challenge. Europe in particular is vulnerable to the economic hit from the conflict given its regional proximity and reliance on Russian gas, while global growth will also suffer because of the war, sanctions on Russia and new restrictions on activity facing the Chinese economy.
in comments interpreted as increasing the prospect of a 50 basis point rise – twice the typical amount. Not only will China’s growth suffer a potential pullback linked to the outbreak, but pandemic supply chain pressures that had begun to ease may again become elevated, prolonging the inflationary effects for other economies.Despite these challenges, central bankers should not interpret the difficulties ahead as reasons to avoid tightening now, Mr Shearing said.