The coronavirus and its variants, as the latest to break onto the world stage, will be a concern for central banks. However, it will not displace the great challenge of more sustained inflation over time.
And this inflation will be aggravated by omicron. Analysts already expect it to cause new interruptions in supply chains, and therefore more persistent inflation over time.
Covid-19 maintains the ability to alter demand and supply. It is also reflected in episodes of “risk-off” in the financial markets, acknowledges the CIO of investments of Axa Investment Managers Chris Iggo.
Typically, unexpected shocks tend to raise questions about the ability of the world economy to maintain its pace of recovery.
“Looking ahead to 2022, investors need to consider a number of questions about the likely path of inflation: whether central banks will have to do more than is already planned, and how portfolios should adapt to hedge against a worse outcome ”, explains the source.
The Chinese central bank tightens monetary policy, doubts in the BoE
December will be a key month in the monetary policies of the central banks, although the first movements are already beginning to be seen. They range from a tightening by the Central Bank of China (PBOC) to doubts from the Bank of England (BoE).
The former has surprisingly signaled that it will cut the amount of cash banks must hold as reserves. It is the second such move this year, freeing up 1.2 trillion yuan in long-term liquidity to reinforce the slowdown in economic growth amid persistent cases of coronavirus.
In this way, it will reduce the mandatory reserve ratio for banks by 50 basis points as of December 15. This cut will join the one already made in July and aims to intensify support for the economy, especially for small businesses.
Meanwhile, doubts assail the BoE. He estimates 5 percent inflation for 2022, but it is not clear that he will tighten his monetary policy.
Already in the previous meeting, the central bank surprised by not raising rates, despite the fact that the market discounted that it would be the first in the West to do so.
Precisely, the deputy governor of the BoE, Ben Broadbent, indicated that he still did not know if he would vote in favor of maintaining interest rates or raising them at the December meeting, but indicated that the BoE forecasts showed the need to increase the costs of the loans in the future.
“I go to these meetings very often without knowing what to vote for.” Regarding the new variant, he added that “the best way to see it is to look at our latest series of forecasts, think about the economy, think about the data we have had since then.”
The key meeting of the ECB
On December 16, the meeting of the European Central Bank (ECB) will take place. The meeting occurs when inflation shoots up to 4.9 percent in November.
Analysts worry that together they will increase the possibility of an “aggressive” switch to withdraw stimulus earlier than investors expected, increasing the odds of a sell-off in the eurozone government bond markets.
“On omicron, it is clear that it will maintain inflation for longer because the disruption of supply chains will last longer,” said a member of the ECB’s governing council.
Although the central bank is expected to announce at its meeting that it will stop buying new bonds in March under the 1.85 trillion euro emergency program launched in response to the pandemic.
Policy makers at the ECB could also delay a further decision on how many more bonds to buy in 2022 until early next year.
The Fed’s aggressive tone
Finally, the Fed has adopted a more aggressive tone in the face of inflation. Its president, Jerome Powell, has recognized that it will be more persistent than initially thought.
Even so, the sources consulted consider that the arrival of the omicron variant of coronavirus adds more uncertainty to the economic recovery and will delay the rate hike scheduled for June 2022 by one month.