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Home / Markets / Mark To Market /  Central banks in a bind as Omicron, inflation rear their heads

Global central bankers must be feeling caught between the devil and the deep blue sea. On one hand, inflation is wreaking havoc on manufacturers and consumers. And on the other, there is not much clarity on the impact of the Omicron variant of coronavirus yet. As a result, central banks have to make some tough decisions on interest rates and unwinding of stimulus.

“In view of the significant increase in inflationary pressure in the US, the financial markets are awaiting signals regarding the pace at which bond purchases will be curtailed and the anticipated turnaround in interest rates next year," Swiss-based research house LGT said in a note on 14 December. However, the high degree of uncertainty relating to Omicron could slow down the motivation of central banks, added the note.

Spectre of rate hikes
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Spectre of rate hikes

Since inflationary pressures continue to rise in developed and emerging nations, its repercussions on monetary policy decisions would be closely watched by global investors. This week, a host of major central banks are meeting for one last time in 2021. The US Federal Reserve’s two-day meeting begins on 14 December. The European Central Bank, the Bank of England and the Bank of Japan are also scheduled to meet this week.

“Markets do not expect the Bank of England to move given the economic uncertainties created by Omicron. The US Federal Reserve faces different challenges. Pandemic savings in the US were the highest in the world, and US consumers saved in the manner of Scrooge McDuck. That required liquidity supply. As those savings are spent, liquidity supply can fade faster," Paul Donovan, chief economist at UBS Group AG said in his podcast on 13 December.

A faster-than-expected tightening by global central banks and withdrawal of stimulus spells trouble for equities. “Inflation and its impact on central bank policy will continue to exert outsized influence on equity market volatility," Saira Malik, CIO and head of equity at Nuveen Asset Management said in her weekly market commentary on 14 December. “The Fed’s more hawkish tone came as a surprise, causing investors to grow leery of a potential misstep in the timing or magnitude of contractionary measures," she added.

Back home, though retail inflation remained in the RBI’s tolerance band of 2-6%, economists caution about the rising pressure on retail inflation. Indian equities continue to trade at premium valuations to their emerging market peers, despite the risks of rising inflation and Omicron.

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