Ambrose: Central banks are making another horrible mistake
Inflation will abate gradually of its own accord, without the need for a punishment beating
Western central banks are on a misguided mission to restore their damaged credibility
The central banks are pushing through with triple-barrelled rate rises after the inflation fever has broken; after the commodity boom has deflated; and after key monetary indicators on both sides of the Atlantic have turned negative. They are prisoners of lagging indicators.
Fed has begun draining $95 billion a month of dollar liquidity through quantitative tightening. This squeezes the offshore dollar lending markets. It is slow torture for borrowers in the developing world with dollar liabilities.
The Bernanke Fed long insisted that quantitative easing was a necessary and powerful stimulus: now the Powell Fed asserts that QT is just background noise.
Monetarists beg to differ. Both narrow and broad money have been contracting for several months. In real terms, they have collapsed. Simon Ward from Janus Henderson says broad M4 money in the G7 bloc peaked 20 months ago and is now below trend levels. “Inflation risks are fading fast,” he says.
The European Central Bank’s stated plan for jumbo rate rises is even more questionable given that Europe’s inflation is chiefly caused by an external energy shock, beyond central bank competence. High fuel costs cause deflation for the rest of the economy.
One day people will look back and ask what possessed the ECB’s governing council to keep tightening hard into the teeth of this storm. The decision will live in monetary infamy alongside Jean-Claude Trichet’s rate rise in July 2008, when the world’s financial system was visibly keeling over.
Ambrose Evans-Pritchard Telegraph 22 September 2022
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