The current situation facing most central banks is too delicate as policymakers struggle to keep the biting inflation under control with little success.
Missed CPI Index
The consumer price index (CPI) consensus prediction for the United States was off target. The CPI index increased by 0.1% when experts believed it would decline. However, analysts must change their predictions of the Federal Reserve’s proposed rate hike this week.
The experts moved it to 75 basis points from 50 as expectations continue to grow by 100 percent.
Furthermore, the headline CPI increase was slight due to a sudden drop in the price of energy. However, the core inflation will pull out the last cent from volatile things like food and fuel. Still, the inflation rate for these things was up 0.6%.
Along the way, investors are banking on the Fed to continue increasing the interest rate until inflation is at least stabilized.
Moreover, a 75-basis point hike will push the interest rate target for the Fed within the range of 3.0% to 3.25%. On the future contract, the rate might likely rise to 4% by the end of the year.
This indicates a further spike following the Federal Open Market Committee’s upcoming meetings in the last two months of 2022.
BIS Defends Rate Hike
Commenting on the increased rate hike by the Fed and other policymakers, the Bank for International Settlements (BIS) noted this as the right approach. According to BIS, the aggressive move is necessary to avert further issues even if a likely recession does happen.
Claudio Borio, the chief economist at BIS, explained that central banks must continue raising rates frequently.
From the European Central Bank (ECB) perspective, chief economist Philip Lane added that further hikes are necessary. The ECB policy rate is still in place following the shock hike of 75 basis points at the start of September.
Meanwhile, compared to the United States, Europe is deeply hit. Spiraling inflation and an energy crisis have continued to threaten Europe’s economy and push household income to the brink.
Moreover, Lane was one of the experts who downplayed the threat of inflation in Europe for some time.
ECB Under Pressure
Like the U.S. Federal Reserve, the ECB is under pressure to cut its Euro balance sheet. The current balance sheet is approximately 8 trillion Euros, and the ECB is behind the Fed in this area.
Christine Lagarde, the ECB president, revealed during the previous policy discussion that it is too early to assess the QT. However, the pressure has now reached a stage where policymakers are expected to deliberate during the next governing council meeting in October.
Similarly, the Bank of England (BOE) is facing increased criticism for its slow reaction to inflation.
Due to the death of Queen Elizabeth II, the Monetary Policy Committee postponed its meeting.
However, it is expected that the BOE will also hike interest rates by close to 50 basis points before the end of the week.