Central bank balance of power shift raises policy error risk

Central bank balance of power shift raises policy error risk

FRANKFURT/LONDON- In just a few short weeks, the balance of power at the world's top central banks has shifted to conservatives, heralding the biggest wave of policy tightening in years.

Yet the rapid retreat of doves in the face of sky-high inflation increases the risk of a policy error as economic fundamentals are not changing as fast as policy sentiment.

The problem is that central banks are under social and political pressure to deal with soaring prices that sap household incomes, erode wealth and dominate the news cycle.

But monetary policy is ineffective in curbing near-term price pressures and action now will only start to take effect when inflation is likely to be retreating sharply anyway.

Still, the European Central Bank put a 2022 rate hike on the table on Thursday and the Bank of England raised rates a quarter percent with a big minority pushing for an exceptionally big 50 basis point interest rate hike.

These moves came just days after the U.S. Federal Reserve signalled a series of rate increases, with the first one likely coming next month, possibly followed by three more moves this year.

With the ECB joining the hawkish camp, the Bank of Japan remains by far the biggest outlier, not