Omicron forces central bankers to look back at crisis

Two years since Covid-19 first emerged, global central banks are about to determine if their economies are strong enough to withstand the impact of its most elaborate mutation yet. 

Officials at over a dozen monetary authorities, including the US Federal Reserve, will once again try to make a policy judgment about a medical phenomenon, being forced to take a view before scientists fully understand the implications of the omicron variant.

What's different compared with the economic fallout from the initial coronavirus outbreak is that central banks have the experience of past shutdowns to gauge, restrictions on activity in most countries are less draconian, consumers and businesses have learned to adapt, billions of vaccines have been given, and this time there's surging inflation to contend with as well.

But the challenge of forming monetary policy using a crooked rear-view mirror of pandemic economic data and an obscure image ahead of the dangers of omicron -- all the while enduring the noise of spiking consumer prices -- still makes central bankers' jobs hard to envy right now.

That combination of extremes makes it likely that only those with relative certainty about the impending threat of inflation on their economies will rush to act on it, rather than waiting until the new year to take a fresh look. 

Of the 20 or so central banks meeting this week, among those seen by economists as most determined to tighten are Russia, Mexico and possibly Norway. 

Within the Group of Seven, the Bank of England is no longer anticipated to begin raising borrowing costs, the Fed may accelerate its wind-down of stimulus, and the European Central Bank will outline its future plans for bond buying. The Bank of Japan's focus will probably be on whether it extends its emergency corporate funding programs. 

While central bankers weigh the risks, inflation is also preoccupying G-7 finance ministers, who'll convene virtually on Monday to discuss the recent price surge. 

Federal Reserve Chair Jerome Powell and his colleagues, who meet Tuesday and Wednesday, are expected to speed up their removal of policy support and signal interest-rate liftoff next year, amid the hottest inflation since 1982.

Powell told lawmakers last week it would be appropriate to consider reducing the central bank's bond purchases more rapidly to wrap the process up a few months earlier than mid-2022, as initially planned. Quarterly Fed forecasts could show two or even three hikes in 2022. 

Fed officials will have another inflation figure in hand for their deliberations after the Labor Department issues its report on November prices paid to producers. The agency reported last week that annual consumer prices advanced by the most in nearly 40 years.

Retail sales, industrial production and housing starts round out the US data releases in the coming week. 

Asia

China's industrial production, retail sales and investment data for November will be closely watched at mid week after signs of stabilization in October. 

The BOJ is expected to keep its main policy settings on hold while reviewing whether to continue its pandemic support program beyond the planned end-March expiry. That decision could be influenced by the Tankan survey coming out at the start of the week with the latest snapshot of business sentiment. 

Minutes from the November Bank of Korea meeting due on Tuesday, and a briefing on inflation by Governor Lee Ju-Yeol on Thursday, may offer clues on the likely timing of the bank's next interest rate hike. 

Figures out Thursday are expected to show a sharp contraction in New Zealand following its most recent virus lockdown. Australian jobless numbers will show how the economy is faring across the Tasman Sea, with RBA Governor Philip Lowe due to speak on Thursday. 

Pakistan, the Philippines, Indonesia and Taiwan also have central bank meetings.

Europe, Middle East, Africa

U.K. labor-market data and inflation will provide the BOE with final glimpses of the health of the economy in the two days before its much-awaited decision on Thursday. Economists reckon the consumer-price report will show the highest reading in a decade, with their median forecast of 4.7% for the outcome. 

The BOE meeting itself is likely to be less of a cliffhanger than it could have been, with officials now expected to hold off on raising interest rates until February. Uncertainty over omicron -- with new restrictions introduced by the U.K. on Wednesday -- is likely to weigh on even the most hawkish members of the Monetary Policy Committee.

That decision is among several on Thursday within the region, including most prominently the ECB. Policy makers led by President Christine Lagarde are due to reveal the parameters of future bond buying as they agree to end emergency purchases in March as previously flagged. Officials will also release their first economic forecasts for 2024. 

Earlier on Thursday, the Swiss National Bank will probably maintain ultra-loose policy consisting of negative rates coupled with currency interventions. Half an hour later, Norway's central bank is expected by economists to raise its deposit rate to 0.5%, though pandemic restrictions have raised the possibility of a delay to that hike. 

Elsewhere in Europe, the General Council of Sweden's Riksbank will report on whether Governor Stefan Ingves and his deputy broke any codes of conduct by holding stock in companies whose debt the central bank purchased. 

Hungary's monetary officials will announce monthly and weekly rate decisions as policy makers prepare to announce the end of QE. Meanwhile, Russia's central bank is expected to deliver another interest-rate increase on Friday to rein in inflation, with a 100 basis-point move currently foreseen. 

Turkey's central bank meets Thursday to decide whether to halt interest-rate cuts or further lower the benchmark, as demanded by President Recep Tayyip Erdogan. That economic experiment has come at the expense of higher inflation and a weaker lira. 

In Africa, the Bank of Uganda will likely keep its key interest rate on hold at 6.5% on Tuesday to support economic growth. And South African data on Wednesday is expected to show the inflation rate edged closer to the top of the central bank's 3% to 6% target range. 

Latin America

Brazil's central bank on Tuesday posts the minutes of its Dec. 7-8 meeting, at which it hiked its key rate for a seventh straight time to 9.25%. Traders now see it hitting 11.75% in 2022. The quarterly inflation report out Thursday should help refine forecasts and hone guidance.

Chile's central bank is expected to raise its key rate for a fourth straight meeting from the current 2.75%, as inflation has jumped.

Economic activity reports out Wednesday should show Peru expanding at a brisk clip while Brazil is increasingly gripped by stagflation. Look for inflation readings in Argentina to come in at about 3% on the month and faster than 50% annually.

On Thursday, Mexico's central bank is expected to raise its key rate by a quarter-point for a fifth straight meeting, to 5.25%, though inflation's push to a near 21-year high may complicate deliberations.

Also Thursday, Argentina becomes the last of the region's big economies to report third-quarter output.

Closing out the week, Colombia's GDP-proxy data should hit double-digits for an eighth month while its central bank continues to tighten, raising its key rate to 3% with inflation moving higher over the target.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement