Central Banks Have Yet To Script The Final Act Of The Inflation Fight As Risks Rise

• Major central banks may be deep into their drive to raise interest rates in hopes of killing inflation, but the endgame remains far from clear as price increases prove harder to slow than expected, and analysts caution that financial markets could still break along the way.
• The U.S. Federal Reserve, the European Central Bank and the Bank of England are all still raising rates, and policymakers are open about the massive uncertainty surrounding their projections and the risk they may have to do more than expected.
• However, it is felt that all are closing in on a peak interest rate for this round of monetary policy tightening while holding fast to projections that inflation will slow steadily over the next year or two without a major blow to economic activity.
• That view has received a sceptical response from top global policymakers and analysts who see a world where persistent shortages of labour, cleavages in global supply, and wobbly financial markets may force a choice between higher and longer-lasting inflation, or a deep recession to fix it.
• The prospect of inflation falling alongside a gradual return to the pre-pandemic state of affairs is implicit in how central banks are framing the path forward. Among the Fed, ECB and BoE, only the British central bank projects a recession will be needed to slow inflation - only a mild one at that. The ECB expects to win its inflation battle with no change in the unemployment rate. The U.S. central bank officials have split the difference, projecting a modest one-percentage-point rise in the unemployment rate this year from its near-historic low of 3.5%, and slow, but continued, economic growth.
• Against that outlook, Fed policymakers last month indicated that one more quarter-percentage-point rate increase at their May 2-3 meeting, which would raise the policy rate to the 5.00%-5.25% range, could be the last of this tightening cycle.

(Source: Reuters)