Banks face inflationary pressures amidst global energy crisis

In the face of soaring energy prices, central banks are poised to take decisive action to combat inflation, marking a new era of monetary policy.

Ecb and fed confront rising inflationary expectations

Against the backdrop of the ongoing conflict in Iran and the energy disruption in the Gulf, Christine Lagarde and Jerome Powell, the heads of the European Central Bank (ECB) and the US Federal Reserve (Fed), respectively, are set to meet amidst growing concerns over inflation expectations.

Many economists are now openly discussing the possibility of interest rate hikes in the West, despite the war in Ukraine lasting only two weeks. The Fed is scheduled to meet on Wednesday, 18th, with data that, in another context, would necessitate a new downward revision of rates following last month's employment report. According to Fed Watch from CME, markets expect no changes from the central bank.

The next day, the ECB will convene, with a different interest rate environment (2% vs 3.75%), providing room for Lagarde to consider a preemptive rate hike, as urged by the ECB's hawkish faction.

Lessons learned from past mistakes

Both Lagarde and Powell have the benefit of hindsight, having learned from past mistakes during the COVID-19 pandemic. In 2022, the ECB and Fed faced criticism for their slow responses to rising inflationary shocks triggered by the Ukrainian conflict. The US central bank quickly raised rates in a preemptive move, while ECB policymakers debated whether inflation was transitory or permanent, ultimately lagging behind.

As Ronald Temple, Lazard's chief strategist, notes: