Three among the most important central banks in the world have just announced the bounds inside which their actions will be inscribed in 2022. The Bank of England has informed without any ambiguity of its will to conduct a restrictive policy through increasing again its main interest rate by a quarter of a point two months after a first augmentation. The Federal Reserve in the United States appeared more moderate but is determined to act against inflation. It has confirmed the coming at an end of its economy supporting program through the acquisition of bonds on the market and has let understanding that its first interest rate increase will occur in March but has not given its opinion about the number of rate rises all along the year. The European Central Bank has been more cautious. Only a very progressive reduction of its two purchase programs on the market of State Bonds will be maintained. But when until now no rate increase was publicly considered in 2022, this commitment has not been explicitly mentioned, which has given to believe that the institution will proceed this year to a turnaround toward a more restrictive monetary policy.

Central banks mandate in the developed countries, with different formulations and sometimes nuances, is to act to guarantee price stability. The economic crisis generated by the Covid-19 pandemic, has temporarily set aside this principle. The States have adopted programs dedicated to supporting the activity and employment through taxes and social charges reductions and direct aides to enterprises and household which have increased public deficits and indebtednesses. They have even offered, as in France, credit guarantees in order that enterprises have at their disposal the necessary financings to go through the deep recession to which they were confronted. Then, the central banks have adopted accommodative policies allowing the States to finance themselves with the best possible conditions, through taking profit of very low and sometimes even negative, as in the euro zone, interest rates.

These policies have been crowned with success and the major developed countries have known a very strong recovery in 2021 which has allowed them to regaining and sometimes to even going beyond, as in the U.S., the production level they had before the sanitary crisis. In a first time, these money creation policies have had a low impact on the prices evolution. These ones had been stable for several years to the point that, in Europe, the ECB had fixed as its objective to make them rebounding to the level it estimated consistent with long term economic equilibriums, i.e. 2%. Then prices started to increase much faster than forecasted due to the perturbation of the supply chains caused by the restrictive measures adopted in some States to fight against the pandemic. But that phenomenon was, then, qualified as transitory.

To that situation geopolitical tensions were added with their consequences on the fossil energies prices. In the euro zone, the different regulations regarding prices and  competition in natural gas and power have amplified the inflationist rebound. In the United States, the year-on-year prices increase in 2021 has reached 7%. It was 5.7% in Germany and 2.9% in France when in this country it was only 0.5% during the previous year. Regarding the full euro zone, inflation has been 5.1%, far from the 2% objective. In all these countries, one of the factors which allowed to considering the phenomenon as transitory, wage stability, is put into question with a very high number of jobs creations, the appearance of shortages and the general diminution of unemployment rates. The pressures in favor of purchasing power became stronger. In France, the wages increase is mentioned among the proposals made by most of the candidates of the coming presidential election. So the transitory character of the inflation is put into question and that cannot be ignored by the central banks.

The Bank of England has increased its main rate twice without any hesitation. The situation is much more complex in the U.S. where we are far from the Paul Volcker attitude at the end of the Seventies. A too quickly restrictive policy could break the rebound observed in 2021 but the main risk is not there. Financial markets have enjoyed a very high increase in 2021. Through provoking an anticipations turnaround, Wall Street could suffer a deep fall. The coming back of the volatility, especially on the Nasdaq, which has been observed since the beginning of the year, definitely constitutes a warning. Nobody has forgotten the consequences of the sub-primes crisis on the American economy and even if the situations are not the same, it is sure that it is not anymore possible to ignore repercussions of the financial markets evolution on the real economy. That must incite the Fed to be cautious.

The situation in Europe is not very different. The last ECB declarations must not mislead. Through a very diplomatic message, it has been recognized that the inflationist risk has become real and that it must take it into account in respect of the institution mandate. It was necessary in order to show to the countries like Germany which are more hurt by inflation than the other ones that it was important to react. But the ECB cannot allow itself to triggering a new crisis of the euro. The States, to cope with the pandemic have massively increased their indebtedness. The move from an accommodative policy to a more restrictive one, conform to the mandate, would provoke an heavy increase of charge of their debts, and which is more worrying, a deepening of the spreads in the States financing conditions.

As soon as a possible, even if it is not yet decided, evolution of the monetary policy has been mentioned, an increase of the spreads has been observed. On the 10 years bonds, the one between France and Germany increased from 35 to more than 50 basis points. With Italy, the spread is now over 150 basis points. Except if we take up the risk to come back to the situation of the euro zone we have known with the Greek debt crisis, and from which we emerged precisely thanks to the Mario Draghi “whatever it costs”, the ECB must take into account the financial unbalances of the members States and especially, the high disparity between them. Between accepting during a necessary period an inflation above the objectives inscribed in its mandate and taking the risk to start a financial crisis which would follow the sanitary and the economic crisis which have just hurt Europe, the ECB road is very narrow.

Years after years, the central banks role in the economic policy is becoming more important. Without them and especially without the credibility they acquired as the time goes by, the States wouldn’t have been able so easily to have at their disposal the resources they allowed them to coping with the sanitary crisis. But that credibility has limits and the success of their future action will depend from their ability to grasp these limits. Along with being independent, the central banks cannot ignore the consequences of their action on financial markets and the political and economic constrains of the States where they operate. So will be their challenge during the coming decade.