Central Banks Were ‘Too Complacent’ About Inflation Last Year: Singapore Prime Minister

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The central banks took a relaxed approach toward inflation last year and must now take “drastic measures” to deal with the current high inflation, Singapore’s Prime Minister Lee Hsien Loong said on Sunday.

Lee said in an interview with Nikkei Asia that the global economy had recovered from the COVID-19 pandemic faster than projected, in part due to the stimulus measures, according to a transcript released by the Prime Minister’s Office.

But the stimulus measures continued to be applied “generously” even when the economy in the United States and Europe was clearly improving, contributing to a spike in inflation even before the Ukraine war, he said.

“The war has made it worse because it has disrupted energy supplies, with Russian energy now being blocked from world markets. It has disrupted food supplies, grain certainly. That has added a supply side inflationary shock as well,” he said.

Lee said the central banks were relaxed about the prospects of inflation being kept under control and rather concerned about deflation, going so far as to aim to bring inflation up to a certain level last year.

“I think they were too complacent even then. But now it is quite clear that they have to change their stance, and I believe that they are doing so,” Lee remarked.

“The difficulty is that now that inflation is quite high, you need quite drastic measures in order to bring it back down and prevent inflationary expectations from taking root. It is very difficult to do that and have a soft landing,” he added.

“There is a considerable risk of doing what you need to do but as a result, provoking a recession,” Lee said, noting that this had happened frequently in the 1960s, 70s, 80s, and 90s.

“That is a risk which we have to anticipate and watch out for. You will have to take that risk because if you do not act against inflation, that will become a very serious problem for the world.”

As for the debt situation in Asian economies, Lee said that “their debt is not as severe a problem as it was before the Asian financial crisis in 1977 and 1998.”

“A lot of the debt is denominated in domestic currency, unlike the last time when it was denominated in U.S. dollars. But the food and fuel prices will cause them inflation as well as hardship. That is a problem,” Lee said.

“Overall I think that the emerging markets will be economic hardship in their societies, but the judgment is that we probably will not have an emerging markets financial crisis,” he added.

Inflation rates have risen in many countries, including the United States, which saw its annual inflation rate increase by 8.3 percent in April. The inflation rate in the United Kingdom soared to 9 percent in April, its highest level since 1982.

Consumer inflation in Japan exceeded the central bank’s 2 percent target in April for the first time since 2015, while core inflation in Singapore reached a 10-year-high of 2.9 percent in March on a year-on-year basis.

Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee hearing on Capitol Hill in Washington on March 3, 2022. (Tom Williams/Pool via AP)

For most of 2021, the Federal Reserve had used the term “transitory” to describe the high inflation rate and insisted that it would recede when supply-chain bottlenecks eased. Fed Chairman Jerome Powell subsequently ditched the term in December, citing the heightened risk of higher inflation.

Speaking in an interview with The Wall Street Journal on May 17, Powell said that the central bank was prepared to increase interest rates until prices began coming down to a healthy level.

“We will go until we feel like we are at a place where we can say, ‘Yes, financial conditions are at an appropriate place. We see inflation coming down,’” Powell said. “We will go to that point, and there will not be any hesitation about that.”

At present, the Fed is maintaining the interest rate between the range of 0.75 and 1 percent. Over the next 12 to 18 months, interest rates could be raised up to 4 percent if inflation does not show any signs of coming down.

The Fed had raised interest rates by 50 basis points in May, with Powell indicating that the bank might resort to similar moves during its June and July meetings.

Powell also admitted that the bank faces a difficult task of slowing down economic growth in order to lower inflation but without triggering a recession. To achieve this would be a challenge since inflation is high and unemployment is already very low, he stated.

Naveen Athrappully contributed to this report.