Is pandemic nostalgia haunting central banks?

It’s almost enough to make you nostalgic for the early months of the pandemic. There was clarity of economic purpose: dramatic cuts in interest rates and big fiscal commitments. The outlook was so dire there were few plausible alternatives. Conditions are much more favourable now, and ironically, that makes the choices tougher.
The economic recovery is looking a little shopworn. Growth is solid, but the pace of expansion has slowed. The jobs picture is better, though far from ideal. Inflation is no longer so low that it qualifies for the endangered species list. If anything, it’s a bit too high for comfort. “Transient,” once the Federal Reserve’s favourite word to describe the spike in prices, doesn’t mean gone tomorrow. Central banks are beginning to trim accommodation, or thinking about doing so, but are starting to trip over their messages. The risk of a misstep is significant.
The International Monetary Fund trimmed its 2021 global growth forecast, warning that momentum has been lost. Gross domestic product will increase 5.9% this year, down from the 6% projection made in July. The slight reduction obscured more worrying trends. The Delta variant, strained supply chains, accelerating inflation and rising costs for food and fuel are chipping away at confidence.
This uneven picture has made it tough to predict precisely where central banks are coming from. Different officials, sometimes from the same place, are offering varying paths out of ultra-easy money. Two Bank of England policy makers created a fuss when they signalled a faster degree of tightening might be forthcoming.
Sometimes policy makers can’t even agree on what just happened, even after they pulled off a shock rate hike, as happened in Poland last week. This is unnerving. One of the big themes of the past two decades has been the value placed on forward guidance, the art of officials telling you what they are going to do well in advance and doing their best not to deviate too often. The idea is that more transparency means less potential for market upheaval.
A wrenching pandemic wasn’t at the front of central bankers’ minds when forward guidance came long. Nonetheless, it’s jarring when you are used to consistency and what happens is the opposite. That’s what makes the case of Poland so interesting — and terrifying. The hike of 40 basis points in the benchmark mark to 0.5% not only stunned economists, but appeared to fly in the face of remarks by no lesser person than the bank’s governor, Adam Glapinski, who was saying until just a couple of days earlier that such a move was some ways off. Speaking afterward, Glapinski said: “We had to tighten but not by too much so as not to suffocate the patient.” It begs the question: What disease ails the patient? If inflation is truly a big issue, then 40 basis points isn’t going to do anything.
For transparency, it’s hard to fault the Bank of Korea, which raised rates in August — as widely flagged — and made it quite clear that another nudge awaits in November. The Reserve Bank of New Zealand last week made good on a commitment to push up borrowing costs and signalled there are more where that came from.

—Bloomberg