Central Banks at Crossroads: Fighting Inflation vs. Supporting Economy

Central Banks at Crossroads: Fighting Inflation vs. Supporting Economy

2022-01-24 • Updated

The major central banks will walk different paths in 2022. Some will respond to the threat of inflation, while others will continue to focus on boosting economic growth and recovering from the pandemic.

Policymakers will enter the new year with a cautious tread.  Acting quickly to control prices may kill the economic expansion, especially if inflation subsides on its own. On the other hand, waiting for a longer period to secure the recovery may speed up inflation, and will require stronger and more severe measures later.

Federal Reserve

The Fed has chosen to respond to inflation, as it is no longer appropriate to call it "transitional", and will lead the tightening team.

Fed Chairman Jerome Powell will start raising interest rates as soon as possible, at the March meeting. The US economy is facing the highest inflation rate in nearly 40 years.

The US central bank is moving quickly to withdraw stimulus from the markets. With the economy recovering and becoming strong, the Fed doubled down on its plans to reduce bond purchases from $15 billion per month to $30 billion per month, after noting that continued stimulus was prompting inflation to rise.

At this rate, the Fed will end its bond-buying program by March. Fed officials set to hike rates 3 times at a quarter-point each time during 2022, forecasting inflation and the unemployment rate to drop around 3.5% by the end of the year.

Bank of England

Britain became the first economy in the G7, which has raised interest rates since the beginning of COVID-19, even before the Fed.

The Bank of England has raised rates to 0.25% from 0.1%, as inflation is expected to jump to 6% in April, three times double the bank's goal.

Traders are betting that BoE will follow a series of rate hikes, the sharpest in three decades. They expect BoE to raise rates to 0.5% at the next February meeting. The market believes that the benchmark rate will reach 1% by November.

European Central Bank

While the Fed and BoE should go with tightening, the ECB prefers to continue the stimulus.

The ECB has announced plans to boost its bond purchases and provide more stimulus and liquidity for European economies. European countries are waiting for stimulus because many are subject to severe lockdown restrictions because of omicron. However, ECB plans include reducing bond purchases in March.

While inflation has pushed the Fed and BoE to shift policies, ECB President Christine Lagarde said that the pandemic has again resulted in reducing spending in the euro area and threatening growth.

ECB has ruled out any rate hikes during 2022. The bank has confirmed that it’ll follow the most relaxed point of view over inflation. ECB has also pointed out that exiting years of easing politics will be slow.

Bank of Japan

The Bank of Japan will remain far away from tightening and raising rates, as it sees no inflation.

Japan did not have the same kind of demand for products and goods as other countries. Japanese do not see wage increases such as American workers. In Japan, it is difficult to change jobs, so there is less pressure to increase wages to attract workers or keep skilled talent. As a result, inflation is still low in Japan. Corporates that raise prices tend to lose customers quickly.

BoJ will reduce debt purchases at the end of March and will take gradual steps to reduce pandemic support. Japan is expected to reduce economic stimulus at a much slower pace than other countries.

In 2022, the Bank of Japan will shift gradually from pandemic support to attempt to increase inflation to 2%, which is barely stable above 0%.

People’s Bank of China

As for China, we expect it to cut rates this year while trying to cushion the slowdown in economy No. 2 in the world.

In 2022, the great decoupling between Washington and Beijing will reach its peak, after the trade, financial, and technology sectors already hit. The central banks will walk opposite ways, with the Fed beginning a tightening cycle, while the PBOC will begin to pump stimulus.

Finally, the economic world is divided into separate regions led by major central banks and their conflicting policies this year. This is a new dynamic for markets and an unknown land where they do not know how to move. All things equal, higher rates are positive for currencies, while the stimulus is negative. As a result, the USD may be the strongest currency this year.

Similar

XAUUSD: Markets Slow Down Ahead of NFP
XAUUSD: Markets Slow Down Ahead of NFP

Gold prices rose on Monday as the US Dollar weakened amidst speculation about potential Federal Reserve rate cuts starting in June. This weakened Dollar was partly due to improved risk sentiment pushing US Treasury yields lower. Despite facing challenges from declining yields, gold prices recovered to nearly $2,170 per troy ounce, driven by the Dollar's weakness. Federal Reserve Chair...

USD: PPI Sends The Dollar Flying
USD: PPI Sends The Dollar Flying

Following yesterday's dovish Fed announcement, market expectations for a full 25 basis point hike from the Fed's yearly outlook were scaled back, causing the dollar to weaken. Consequently, EUR/USD saw gains as the dollar depreciated, testing resistance levels around 1.0942 and 1.0960, which correspond to Fibonacci retracements of previous...

USD: FOMC Meeting Takes Centre Stage
USD: FOMC Meeting Takes Centre Stage

Today's FOMC meeting is the highlight of the week, and Antje Praefcke, FX Analyst at Commerzbank, discusses the USD outlook ahead of the announcement. Praefcke believes there's low risk of the Dollar declining post-meeting due to unlikely dovish surprises, especially after strong inflation readings. Instead, the Fed may emphasize...

Latest news

USD: Powell Speaks on Cutting Interest Rates
USD: Powell Speaks on Cutting Interest Rates

Jerome H. Powell, the Federal Reserve chair, stated that the central bank can afford to be patient in deciding when to cut interest rates, citing easing inflation and stable economic growth. Powell emphasized the Fed's independence from political influences, particularly relevant as the election season nears. The Fed had raised interest rates to 5.3 ...

WTT: Currency Pairs To Trade In April
WTT: Currency Pairs To Trade In April

Hello again my friends, it’s time for another episode of “What to Trade,” this time, for the month of April. As usual, I present to you some of my most anticipated trade ideas for the month of April, according to my technical analysis style. I therefore encourage you to do your due diligence, as always, and manage your risks appropriately.

Deposit with your local payment systems

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera