Great Uncertainty – The Observer

If 2020 is the year of the epidemic and 2021 is the year of vaccination, then 2022 will be the year of great uncertainty.

There is no sign of greater uncertainty over the global future than the decisions of the major central banks this week. The US Federal Reserve no longer considers rising inflation temporary, cuts asset purchases by $30 billion and assumes it will raise key interest rates three times in 2022. In the UK, the Bank of England raised interest rates for the first time in three years, from 0.1% to 0.25 %. In the Eurozone, the European Central Bank kept its monetary policy stable, confirming, as widely expected, that it would end its pandemic asset purchase program in March, and announced that it would strengthen its permanent asset purchase program at that time.

The positions of different banks actually reflect different cycle situations. In November, inflation reached 6.8% in the United States, the highest level in forty years. Inflation in the Eurozone was 4.9% and in the United Kingdom 5.1%, the highest values, respectively, in twenty-five and ten years. Moreover, the relative inactivity of the ECB towards the other two central banks can be explained by the base effect from Germany’s higher value-added tax rate, which rose by three percentage points in January 2021. The Eurozone rose by nearly a percentage point compared to a month ago. December. This effect is expected to disappear in January 2022.

But more than all factual explanations, the element that seems crucial in explaining the differences between central banks is the difficulty of predicting what lies ahead in 2022. And economic support programs in many regions of the world may start working on supply problems, both due to covid-related restrictions, Which is likely to continue and even exacerbate with the new, more contagious omicron variant, as well as escalating energy prices. But it is also difficult to predict whether any future restrictions may be broad and stringent enough to have a negative impact on demand. What seems certain from the start is that massive uncertainty about the coronavirus, the impact of vaccines, and the expectation of higher inflation could delay consumption and investment decisions, as well as potentially negatively impacting the service and passenger transportation sectors.

On Europe’s borders, political and economic tensions on several fronts may have unintended effects. Germany’s decision not to allow the Nordstream 2 pipeline to start operation is expected to keep gas prices higher than previously expected and could escalate tensions on the Russia-Ukraine border. In Turkey, it is difficult to ignore the massive economic instability that has caused the currency to depreciate, which may have consequences for Turkey’s willingness to continue to act as a barrier to immigration into the European Union.

John Galbraith says, “There are two kinds of forecasters: those who don’t know and those who don’t know and those who don’t know.” The best one could ask for is for central banks to be among the first. Only then can they maintain sufficient flexibility to respond quickly to the challenges facing the world in 2022.