Europe’s Top Central Banks Take Divergent Tracks as They Confront Inflation

Fed officials on Wednesday set out plans to accelerate the withdrawal of stimulus and signaled they expect to raise interest rates three times next year, a major policy pivot that reflects heightened concern about the potential for inflation to stay high.

The shifts show how central banks’ plans to phase out multitrillion-dollar stimulus policies and move toward higher interest rates are playing out at different speeds in the world’s big economies, which are struggling with incomplete recoveries at the same time as inflationary pressures mount.

“I don’t think that something happening at the Fed is bound to happen” in Europe, ECB President

Christine Lagarde

said at a news conference on Thursday. The U.S., the U.K. and eurozone economies are at different phases of the economic cycle, and received different levels of government support during the pandemic, she said.

The Omicron variant, first identified in South Africa and now detected in more than 70 countries, is further clouding the outlook for an already uneven global recovery.

Officials on the U.K. central bank’s Monetary Policy Committee on Thursday voted eight to one to lift the policy rate to 0.25% from a record low of 0.1%, saying the strength of the labor market meant higher borrowing costs were appropriate to keep a lid on price growth.

The BOE’s action came despite surging cases of the Omicron variant in the U.K., which has triggered new restrictions in the run-up to Christmas in an effort to stem a wave of infections that public-health officials say could overwhelm hospitals. The U.K. on Wednesday reported a record 78,610 Covid-19 cases, the most recorded on a single day.

Omicron is a worry but its economic effects are unpredictable, the majority on the panel said, and its emergence didn’t justify delay.

The BOE’s decision wasn’t widely expected. Though a rate rise had been telegraphed, many investors and economists expected the central bank to hold steady until early next year while the economic effects of Omicron became clearer.

The pound strengthened 0.5% against the dollar. U.K. government bonds sold off with the yield on the benchmark 10-year gilt rising as high as 0.825% from 0.727% on Wednesday before easing down to 0.783%.

Stocks extended gains following the central-bank decisions, with the S&P 500 rising 0.5% Thursday, a day after the broad stocks gauge closed at its second-highest level on record.

The moves at the BOE and the Fed underscore how expectations that high inflation would prove fleeting are giving way to concern that a spell of rapid price growth and low unemployment risks fueling increases in wages and prices, maintaining the inflationary pressure for longer.

The ECB is taking a more cautious approach. The eurozone economy is still below its pre-pandemic level and appears to be slowing sharply, even as the U.S. economy accelerates above its precrisis peak.

“It does feel like central banks are beginning the monetary policy normalization process at different points in time,” said Mark Zandi, chief economist at Moody’s Analytics. He said differences in each region’s labor markets in particular underpin their policy choices.

“The British labor market is leading the way,” he said, citing continued declines in joblessness following the September end of a government wage-support program. “The U.S. is a bit more scrambled and Europe is flagging.”

The ECB said it would end its €1.85 trillion emergency bond-buying program, equivalent to $2.1 trillion, as planned in March, but expand a separate bond-buying program next year. Taken together, ECB bond purchases will slow to €40 billion a month in April from about €80 billion a month at present, and will continue at least through October. The bank said it wouldn’t increase its key interest rate, currently set at minus 0.5%, until it ends its net bond purchases.

“It is very unlikely that we will raise interest rates in the year 2022,” Ms. Lagarde said.

The ECB said it would gradually scale down its bond purchases to €30 billion starting in July, and €20 billion starting in October. As an extra safeguard, the ECB said it could resume its emergency bond-buying program if necessary “to counter negative shocks related to the pandemic.”

With the Omicron variant, “we are venturing in the realm of uncertainty,” Ms. Lagarde said. In that context, she said, it made sense to gradually reduce bond purchases.

The ECB’s decision to keep its bond-buying program open-ended surprised analysts as it contrasted strongly with the Fed’s decision to phase out bond purchases entirely.

The euro edged up 0.4% to trade at $1.1335 and yields on benchmark 10-year German government bonds rose to minus 0.326% Thursday from minus 0.359% Wednesday.

Supply-chain bottlenecks are squeezing Europe’s large manufacturing sector, and governments across the region have recently reimposed social restrictions to contain a fresh wave of Covid-19 cases. The yields on Southern European government bonds have edged up since the summer, putting pressure on highly indebted governments such as Italy’s.

Still, inflation in the eurozone has accelerated sharply, reaching 4.9% in November, the highest rate since the euro was launched in 1999 and significantly above the ECB’s 2% target. In Germany, inflation has reached 5.2%, uncomfortably high for a nation with deep-seated historical fears of high inflation.

More than a dozen central banks have raised interest rates this year, according to Bank for International Settlements data, as the global economy reopened following widespread restrictions to contain Covid-19.

Norway’s central bank also raised its key interest rate Thursday, despite the country facing its own surge in Omicron cases. The Norges Bank lifted its key interest rate to 0.5% from 0.25%, and said a further increase was likely in March.

—Anna Hirtenstein and Paul Hannon in London contributed to this article.

Write to Jason Douglas at [email protected] and Tom Fairless at [email protected]