Tug of War That Markets Fear Is Central Banks Versus Governments

In the all-hands-on-deck economics of the pandemic, governments and their central banks shared the same goals. Now they’re starting to pull in different directions.

The tug-of war has already claimed one victim. The UK’s attempt to boost its economy with fiscal stimulus backfired, triggering a bond rout. In the short-term, the Bank of England was forced to step in and support markets, while Liz Truss’s government partially reversed course. In the medium-term, investors are betting it’ll mean higher interest rates for Britons.

Similar tensions may be in store across the world’s financial markets, as economies slow while inflation remains stubbornly high.

When monetary authorities look at soaring prices, they see inflation that must be stamped out — by driving economies into recession if needs be.

But politicians in charge of budgets see something different, because voters hit by a cost-of-living squeeze expect their governments to help out, which typically means spending more or taxing less.

That’s what many of them are doing — especially in Europe, where natural-gas shortages caused by the war in Ukraine threaten blackouts and power rationing this winter. Germany alone is planning to borrow as much as 200 billion euros to tackle the energy crisis.

Elsewhere, Japan is adding more fiscal stimulus, and many countries have stepped up food or energy subsidies.


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