Central banks should wait between three and six months to be able to assess the state of the economy, an analyst writes.
The main dilemma for central banks comes from the fact that the Federal Reserve has not yet fully realized the economic impact of interest rate hikes.
Because of the slow move toward tightening, the Federal Reserve and the European Central Bank may overdo it in proving their restrictiveness. They need to weigh not only the real economic damage that would come from excessive tightening, but also the threat to their credibility from having to reverse course in the coming year.
There is increased uncertainty around the inflation process.
A larger share of overall inflation in Europe is driven by energy and food prices, which are more difficult to contain through monetary policy. In this respect, stopping the tightening cycle makes more sense for the European Central Bank than the Federal Reserve. Yet central banks around the world continue to push for an interest rate increase and promise that there will be one in the future.
There is a risk of overdoing it with further interest rate increases.
Central banks face difficult choices. Unless new evidence of rising inflation emerges, they should pause for three to six months and then assess the economy.