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The case for loose monetary policy ‘just isn’t there anymore’

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Jim O’Neill (ex-chief economist Goldman Sachs Group) in Italy, 2019.

Alessia Pierdomenico via Getty Images| Bloomberg via Getty Images

The following are the Federal ReserveAnd the Bank of EnglandFaced with persistently high inflation, adopting hawkish tone should become more commonplace, says Jim O’Neill (senior advisor, Chatham House).

Last week, Fed Chair Jerome Powell retired the term “transitory”To describe inflation, O’Neill and analysts described it as a “mea culpa”, or admitting that the central bank was wrong in its earlier assessment.

Bank of England surprised marketsInstead of announcing a hike, interest rates were held at an all-time low in November.

Inflation has reached multi-decade levels in the U.S. as well as the U.K. due to soaring energy prices and tight supply.

The emergence of the Omicron Covid variation has raised some doubts for the markets about when tightening will actually begin.

O’Neill is a former Chairman of Goldman Sachs Asset Management and a veteran economist. He spoke to CNBC’s “Street Signs Europe” on Monday.

If you can overlook the uncertainty surrounding the [omicron] variant, when you end this year where we have ended with the scale of recovery we have had — notwithstanding what is probably a statistical fluke with the payroll survey Friday — the huge bounceback in growth, why do we need the same scale of emergency monetary policy that we had 18 months ago all over the western world?” O’Neill said.

The U.S. economy added just 210,000 jobs in NovemberAlthough the unemployment rate declined sharply from 4.6% – 4.2% in an economist survey by Dow Jones, it was still well under the expectations of 573,000. This isn’t expected to slow down the Fed from ending its easy policies. The country saw its largest inflation increase in over three decades, with consumer prices rising 6.2% per year in October.

O’Neill suggested that maintaining policy at historical accommodative levels could lead to central banks being less able to respond to an economic shock. According to O’Neill, policymakers could be more effective in tightening their policies now to limit inflation and allow for growth to slow down while they are still flexible enough to adjust to an unexpected event.

“I believe the Fed made the right decision to move forward with this initiative, but I do think they should have started it earlier. It is my hope that this twist will be in the micron [variant]He said that the Bank of England should not be impeded from raising rates.

Although markets had generally priced in the possibility of a December rate rise at the Monetary Policy Committee’s next meeting, they have been somewhat disappointed by the unexpected emergence and evolution of the omicron variation.

O’Neill said that O’Neill had predicted that unemployment would plummet after the U.K.’s furlough programme ended. That was despite the fact that “nobody could have imagined that we’d find ourselves in such a position one year ago.”

Bank of England Governor Andrew Bailey acknowledged after the November policy meeting that warning signsThere was no information on inflation. It has been consistently at or above 3% since then, exceeding Bank’s goal. Bailey stated that it would take more data on post-furlough employment for the bank’s interest rate hike to increase visibility.

“I don’t think it is just the U.K., but in the U.K., the evidence of inflation surprising on the upside and growth coming through generally better than anybody would have dreamt about, particularly policymakers, a year ago — the case for having such an accommodative monetary policy just isn’t, in my opinion, there anymore,” O’Neill said.

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