Omicron poses new inflation headache for central bankers

The advent of the omicron variant of the coronavirus risks posing new challenges for central bankers by threatening economic growth while adding to inflation pressures.

The advent of the omicron variant of the coronavirus risks posing new challenges for central bankers by threatening economic growth while adding to inflation pressures. 

That’s the initial analysis of economists, who warned that possible new restrictions on activity risk derailing plans to withdraw monetary stimulus while reinforcing the same imbalances that have fueled the current wave of surging consumer prices.  

Omicron has hit the world just weeks away from key decisions by global central banks, with the Federal Reserve possibly accelerating a wind-down of its stimulus, the Bank of England potentially about to raise interest rates, and the European Central Bank plotting how to ease the euro zone off of emergency bond buying.

“It may make central banks question the timing and extent of rate increases, which markets had been pricing in over the next year,” said Alex Brazier, a strategist at BlackRock Investment Institute and former senior official at the BOE. “The question is, how much does it delay the restart” of economies, he said. “Delay means weaker growth in the short term, but stronger growth later.”

Complicating the decision for policy makers is the risk that omicron leads to fresh curbs in manufacturing hubs such as China, aggravating supply-chain issues, while intensifying labor shortages elsewhere as health fears deter people from returning to work.

Such forces could further spur inflation, which already faces a potential acceleration thanks to robust consumer demand heading into the holiday season, supported by pent-up savings.