What are the dilemmas facing global central banks?

Policy outcomes of various global central banks are set to dominate the trading sentiment on the bourses on Thursday.
After the outcome of the US Federal Reserve’s policy meeting, which was announced last night, investors will eye inflation and growth projections by the Bank of England and the European Central Bank. These banks are set to announce their policy decisions later in the day.

Each central bank faces some version of the same dilemma - whether to guard against inflation, end the current era of low interest rates and central bank asset purchases is more urgent than the economic threat posed by the new Covid-variant. However, their different approaches could make for a tumultuous year.
Inflation, labour markets, and the link between the virus and economic performance are behaving differently across the major economies, setting up a potentially sharp divide over how central banks manage the coming stage of the pandemic.
 
This stands in contrast to the synchronised and massive support approved at the outset of the coronavirus pandemic in March 2020.  
While the US Fed has already announced speeding up the tapering program, if need be, the Bank of England has been set off course by Omicron’s fast spread and the imposition of new restrictions in the country.
As regards Europe, the ECB needs to be mindful of the major differences inside the bloc for which it sets policy.
Any big retreat from crisis support could deliver unwanted consequences for the sustainability of the high debt loads in economies such as Italy.

Remember, inflation reached a record high of 4.9% in November in euro region, while Omicron looks likely to become the dominant coronavirus strain with some European economies already locked down due to the delta variant.

The RBI, too, has cautioned against the ‘sticky inflation’ even though it has maintained its inflation projection at 5.3 per cent for fiscal 2021-22 (FY22) for now.
On the contrary, the inflation that is tearing through other parts of the globe remains largely absent in Japan.
As such, only a marginal reduction in corporate asset purchases is under discussion and the final outcome by the Bank of Japan is expected tomorrow.

Given this, most investors, worldwide, have preferred to be on the sidelines over the past one week.
Japan’s Nikkei, for instance, was up 0.01 per cent during the period, South Korea’s Kospi slipped 0.08 per cent.
The UK’s FTSE 100 dropped around 2 per cent and S&P500 in the US eased about 1.5 per cent.
Back home, the Sensex and the Nifty indices have slipped 1.6 per cent each.
On Wednesday, too, the domestic benchmarks ended half a per cent lower at 57,788 and 17,211 levels, respectively.

Commenting on the markets’ performance, Stefan Koopman, senior macro strategist at Rabobank International, said that volatility is high in the equity space and the current market movements predominantly reflect position-shuffling ahead of decisions by various central bank.
There has been no coherent narrative other than simply the wait for these risk events to materialise. < br />

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