WASHINGTON (BLOOMBERG) - The world's top central bankers predicted inflation won't stay low for much longer as they signaled they will push ahead with plans to gradually tighten monetary policy.
Federal Reserve Chair Janet Yellen said on Sunday (Oct 15) that her "best guess" is consumer prices will soon accelerate after a period of surprising softness, a forecast echoed by European Central Bank President Mario Draghi and Bank of England Governor Mark Carney.
The inflation wager capped the International Monetary Fund's annual meetings at which policy makers cheered the healthiest, most synchronized global economic expansion in a decade, while keeping a wary eye on the weakness of inflation and exuberance of asset prices.
"The fear that dominated most of the annual IMF/World Bank meetings since the financial crisis a decade ago seems to have evaporated," said Joachim Fels, a global economic adviser at Pacific Investment Management. He also warned of an "eerie sense of security."
Central bankers nevertheless reckon normal business is finally resuming as they count on improving demand to translate into the faster inflation they expected to materialize sooner. Whether they are right was a matter of keen debate in Washington. US inflation was 1.3 per cent in August after stripping out volatile food and fuel, well below the Fed's goal.
Yellen said she assumed "these soft readings will not persist" and that "the ongoing strength of the economy will warrant gradual increases" in the Fed's benchmark interest rate. Fed funds futures currently suggest odds of 74 per cent that the US will lift its rate again in December having last done so in June.
The US may soon be followed in pulling back stimulus by the ECB and the Bank of England.
Draghi said on Saturday that he is "confident" inflation will soon pick up from September's 1.5 per cent, a position reiterated on Sunday by Vice President Vitor Constancio.
ECB officials are preparing for a meeting on Oct 26 at which they are expected to outline their bond-buying plan beyond the end of this year. While the ECB currently purchases 60 billion euros (S$95.7 billion) of assets per month, policy makers may now cut the pace of buying by at least half to adapt to the improving economy, officials familiar with the matter told Bloomberg.
As for the Bank of England, Carney told CNBC that he may need to raise rates from a record low in "coming months" as the UK economy is "running out" of spare capacity. Unlike many of his peers, Carney faces inflation already above his target in part because Britain's decision to leave the European Union has weakened sterling and is undermining potential growth.
The Bank of Japan was again the outlier.
"Achieving the two per cent price stability target is still a long way off and the Bank of Japan will persistently pursue aggressive monetary easing," Governor Haruhiko Kuroda said.
While Japan has been plagued by low inflation for two decades, other major economies have more recently been forced to ponder why faster expansion and falling unemployment have yet to ignite price pressures.
Potential explanations include a breakdown in the traditional relationship between joblessness and prices, increased trade and technology, a downward shift in long-term inflation expectations and the rise of online shopping.
"We recognize that this year's low inflation could reflect something more persistent," said Yellen. Kuroda said "we have to deepen our understanding of what is behind the current puzzling situation."
Economists at JPMorgan Chase & Co among those predicting inflation will soon emerge. They forecast global headline inflation will reach almost 3 per cent in the fourth quarter, the fastest in over six years.
While inflation has been subdued, asset prices are soaring. The MSCI World Index of stocks last week set a new record and extended its gain this year to 16 per cent.
Still, Yellen said that overall financial stability risks in the US remain moderate. Draghi and Kuroda were also said they saw little evidence of frothiness in markets.
Others in Washington were less sanguine. The market "feels as benign in 2017 as it felt in 2006," said Jes Staley, the chief executive of Barclays, referencing the eve of the crisis.
Referencing a concern raised in the IMF talks, People's Bank of China Governor Zhou Xiaochuan accepted that Chinese companies have taken on too much debt and argued for less financial leverage and fiscal reforms to constrain local government borrowing. "We need to pay further effort to deleveraging and strengthen policy for financial stability," he said.
Another concern for central banks is what to do in the event of another economic slump given interest rates are now so low and their balance sheets have been bloated by quantitative easing.
"How are we going to respond to that is going to be a real concern," said former US Treasury Secretary Lawrence Summers.
The overriding message of policy makers in Washington was therefore not to blow it now that the outlook has improved, especially as doubts remain over Brexit and the future of the North American Free Trade Agreement.
"This does not mean that we are declaring victory just yet," Mexican central bank Governor Agustin Carstens told reporters of the better outlook.