Inflationary consequences of the coronavirus crisis and the reaction of central banks

Abstract

Economic and financial crises are accompanied by rising inflation, especially in developing economies. The economic crisis caused by the COVID-19 pandemic and resulted in a deep recession in the world and national economies, was no exception. To restore economic growth, the country’s central banks have developed and implemented monetary easing programs, which has provoked a trend of accelerating inflation. Inflation is considered a negative phenomenon, and its high level is a threat to economic growth. Realizing the devastating effects of inflation, states take measures to control their growth rate. The most common in the world is the establishment of inflation targeting. The international practice has shown the effectiveness of this regime for many years. Even during the financial and economic crisis of 2007–2008 and the debt crisis of 2012, inflation was low in the developed world, despite the implementation by the Central Banks of monetary programs for quantitative easing. The crisis caused by the COVID-19 pandemic has become one of the deepest in modern history. To overcome the recession and recover quickly, the Central Banks resumed monetary easing programs on a much larger scale. Implementing these programs has resulted in rising inflation in both developed countries and those developing and transforming their economies. At the same time, inflation has reached values not seen in the last 10 years in developed countries. A significant contribution to provoking inflation is the rise in food prices, which occurred due to increased demand after the lockdown and higher energy prices. The increase in food prices in Ukraine made a particularly significant contribution to inflation compared to the introduction of the NBU’s monetary program. The trend of accelerating inflation causes the Central Banks to respond to it by adjusting their interest rates. However, interest rates have not risen in all countries, but only in those where the economy is less intense, and the financial sector is more vulnerable. As inflation rates in almost all countries exceeded the set inflation targets, discussions began on whether to change the target value or the inexpediency of the inflation targeting regime itself and return to exchange rate control. The article presents arguments for the inexpediency of such measures. The conclusion is substantiated that the monetary policy and its implementation is a complex process, and every time the Central Banks are faced with a choice of contradictory decisions.

Keywords

• inflation
• central bank
• quantitative easing
• inflation targeting
• discount rate