MNI STATE OF PLAY: Central Banks Mostly Deaf To Inflation Talk

Massive global stimulus and the possibility of a sudden snap-back to growth as Covid vaccines are rolled out are prompting some investors and commentators to sharpen their focus on a pick-up – even a surge - in inflation, but extensive central bank contacts continue to tell MNI they see this as only a remote possibility.

Some metals and agricultural commodity prices have accompanied gold higher and may portend a change in the outlook, helping push factory gate prices to a near 30-month high in MNI's December Chicago Business barometer [HYPERLINK].

BlackRock CEO Larry Fink is among the most prominent commentators to see inflation as a risk, warning investors last week that steepening bond curves may imply the Federal Reserve will be forced to consider tightening policy in 9 to 12 months.

TAIL RISK

MNI's exclusive coverage since late last year has detected some central banks acknowledging an inflation tail risk. Many see the chance of an uptick this year as economies reopen and base effects feed through from 2020's lower energy costs and pandemic demand shock.

The Norges Bank, with underlying inflation already above target, adjusted its forward guidance at the end of last year to anticipating an increase in interest rates in the first half of 2022. The Reserve Bank of Australia's outlook was also noticeably more optimistic in the latter part of 2020. This week the Canadian dollar spiked on the Bank of Canada's upbeat assessment and potential early tapering, which was foreseen in exclusive MNI interviews with seasoned BOC observers transmitted last month.

Policymakers have taken note of the argument made by former Bank of England policymaker Charles Goodhart and former Morgan Stanley executive Manoj Pradham, who see a demographic shift in China and elsewhere taking the lid off depressed wages and prices. Their book cautions that inflation could jump to between 5% and 10% in the post-Covid recovery period and prominent ECB policymaker Olli Rehn drew attention with his respectful review.

--LAID BACK HAWKS

But even the more 'hawkish' central banks are stopping well short of any panic buttons. The Norges Bank last Thursday spoke of krone appreciation since March and prospects for low wage growth moderating inflation. The RBA will not increase the cash rate until actual inflation is sustainably within the 2-3% target range, some way off 0.7% y/y in Q3 (Q4 is out on 27 Jan.). The BOC said it would maintain QE until its inflation objective is achieved, not currently seen until 2023.

The market fastened on ECB President Christine Lagarde's comment after last Thursday's Governing Council meeting – already stressed in her December press conference – that the EUR 1.85 trillion pandemic QE programme might not need to be fully accessed. It passed over her balancing comment that the ECB could recalibrate the envelope if needed to maintain favourable financing conditions – a worry disclosed in MNI's latest ECB sources exclusive transmitted two days before the meeting.

Representative of the relatively relaxed mood among central bankers is ECB Governing Council member Martins Kazaks. Calling on fellow policymakers to bring forward the timetable to review rolling back pandemic support measures to the spring and not wait until the autumn, the Latvian central bank governor also told MNI in an exclusive interview earlier this month that prospects for weak Eurozone inflation would merely "improve" as the Covid-19 pandemic passes.

In China, where annual CPI turned negative in November for the first time in a decade, price pressure will return in 2021, even if inflation is likely to remain below the central bank's target level, advisors have told MNI.

EASY FED

Underlying the general outlook among central bank policymakers is scant concern that the expected inflation uptick this year will feed through into second-round effects and stoke prices medium-term. Inflation across the OECD's 37 member countries, currently averaging 1.15%, is forecast to rise to only 1.78% in Q4 2022 despite stimulus to combat Covid on a scale not seen since the Second World War.

Chicago Fed economist Leonardo Melosi told MNI he anticipated a decade of low inflation, squeezed by unemployment and lower wage growth.

But with the unprecedented peacetime scale of fiscal and monetary heavy lifting to build an economic bridge across to the other side of the pandemic, the question of inflation risk will remain uppermost as MNI continues to quiz central bank sources.