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Gulf Brokers: Higher Inflationary pressure on Central Banks

July 29, 2021
finance & economy

The central banks are under pressure of fears of higher inflation around the world, and the investors are closely monitoring how the central banks would react to recent record inflation rates.

Recently, the CPI data from the UK and the US showed that the inflation accelerated again in June. On Tuesday, July 13, the Department of Labour reported that US consumer prices posted the biggest rise in 13 years. The US inflation data showed that the consumer price index jumped 5.4%, well above the expectations of 5%. Meanwhile, the UK annual inflation rate rose to 2.5% in June from 2.1% in the previous month, the highest level in almost three years.

At their July meetings last week, the Bank of Canada and Reserve bank of New Zealand decided to leave the interest rate unchanged. However, both central banks have announced that they will reduce their bond-buying program to control the inflationary pressures. “The Committee agreed that the policy of ‘least regret’ now assumes that the substantial level of monetary support, which has been in force since mid-2020, may be reduced earlier,” the RBNZ said.

The Bank of Canada expects inflation to rise above three percent for the rest of the year due to higher petrol prices. The bank says economic conditions have improved enough to reduce its weekly purchases of federal bonds to $2 billion from $3 billion.

On the other hand, the European central bank and the US Federal Reserve still believe that inflationary pressure is temporary. The monetary policy of the United States will provide strong support for the economy until full recovery, Fed Chairman Powell said on Wednesday. European Central Bank President Christine Lagarde said on Sunday that policymakers will not repeat their past mistake of tightening policy too early.

However, many market participants expect a more sustained price increases, which could put pressure on other central banks to reduce the amount of their asset purchase program.

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