A top Spanish economist told a conference today that given the global shock of the pandemic and its global consequences, that inflation was going to be a problem everywhere – and looking further ahead he said it was uncertain how central banks would react in the face of a possible economic decline.
In his economic keynote speech at the IPE Conference & Awards 2021 in Madrid on questions about inflation and the economic cycle, Jorge Sicilia, chief economist at BBVA Group, said that under certain simulations mapping the future path of inflation, BBVA did find that inflation was going to be a problem everywhere, in the sense that it could get stuck above 2%.
“But the second thing we can tell is that inflation is going to be much more of a problem in the US and in Europe,” he said.
The chief economist said BBVA’s simulations for Europe suggested bottlenecks were weighing on inflation and mainly on growth, and that more persistent supply disruptions were a risk.
Given that inflation was set to be problematic, Sicilia said the question was what central banks were going to do – although he said people tended to forget that there were a lot of things that could be done by fiscal authorities, and governments in terms of supply policies.
Sicilia said central banks could be reluctant to raise interest rates.
“But they would not be reluctant to increase interest rates say to 2% in the US, given that the equilibrium in interest rates has declined over the past few years, perhaps we’re going to have central banks easily going to 2% with no sweat if they think inflation is going to be a problem,” he said.
“The issue is, when reaching 2%, what would happen if the inflationary pressure continues. Because if that’s the case, the cost of increasing interest rates further with governments that are significantly indebted might be an issue,” he said.
However Sicilia said that for him the most important question was how central banks would react in a scenario of slowing economic growth.
“It’s whether there’s going to be a significant decline in economic activity, and whether they’re [the central banks] going to risk some fiscal problems to get there if inflation in two or three years has not come down significantly,” he said.
“Everything’s open, but the risks are still mostly to the downside on growth and that weighs on the reaction of the central banks,” Sicilia said.
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