Central Bank chiefs warn of painful inflation

SINTRA, Portugal - Bringing down high inflation around the world will be painful but must be done quickly to prevent rapid price growth from becoming endemic, the world's top central bank chiefs said on Wednesday.

Inflation is breaking multi-decade highs around the world, as soaring energy prices, post-pandemic supply chain bottlenecks and in some cases red-hot labour markets are pushing up the cost of everything and threatening to cause a hard-to-break wage-price spiral.

The process is highly likely to involve some pain but the worst effect would be from failing to address this high inflation and allowing it to become persistent, according to Jerome Powell, Chair of the European Central Bank's annual conference in Sintra, Portugal.

The low inflation of the pre-pandemic era would not return and the ECB, which has underestimated price growth, had to act now, because price growth was likely to stay above the 2% target for years to come, according to Powell's words.

Powell said that engineering policy tightening to avoid a recession in the United States is certainly possible and there are no guarantees of success.

Is there a risk that we would go too far? There is a risk, but I wouldn't agree that it's the biggest risk to the economy, he said. Let's put it that way, the bigger mistake to make would be to fail to restore price stability. Augustin Carstens, General Manager at the Bank for International Settlements, said that policymakers had taken the first step in recognising they had a problem. Their job was to tighten policy as risks were mounting.

Carstens told the European Central Bank that the transition from a low inflation environment to a high inflation environment will be made possible by the full transition from a low inflation environment to a high inflation environment. You need to stop this vicious cycle from happening. The ECB has flagged rate hikes in both July and September, while the Fed increased rates by 0.75 percentage points in June and may opt for a similar move in July.

The Bank of England raised rates by 25 basis points to 1.25% this month, its fifth successive move, and said it would act more forcefully in the future if it saw a greater persistence of inflation.

Andrew Bailey, BoE Governor, told the conference that there will be circumstances in which we will have to do more. We're not there yet in terms of the next meeting. We're still a month away, but that's on the table. He said that you shouldn't assume that it's the only thing on the table, referring to another 25 basis point hike.

Bailey also warned that the British economy was beginning to slow down and that it was now at a turning point.