The end of easy money is upon us.

Two years after the pandemic sent the global economy into a deep but short recession, central bankers are withdrawing their emergency support—and they’re moving faster than they or most investors had foreseen.

The U.S. Federal Reserve is preparing to raise interest rates in March, and last Friday’s jobs report fueled speculation it may need to move aggressively. The Bank of England just delivered back-to-back hikes, and some of its officials wanted to act even more forcefully. The Bank of Canada is set for liftoff next month. Even the European Central Bank may get in on the action later this year.

Rates are rising because policy makers judge that the global inflation shock now poses a bigger threat than further damage to growth from Covid-19. Some say it took them far too long to reach that conclusion. Others worry that the hawkish turn could slow recoveries without offering much relief from high prices, given that some of the surge is related to supply problems beyond the reach of monetary policy.

Central Banks Take Hawkish Stance
There are a couple of outliers among the biggest economies.

The People’s Bank of China appears headed in the opposite direction. It’s likely to make credit cheaper as new virus outbreaks and a property slump cloud prospects for the world’s second-largest economy. And the Bank of Japan is expected to keep policy unchanged this year, though traders are starting to wonder if it can hold the line.

In the emerging markets, many central banks started raising rates last year—and they’re not done yet.

Just last week, Brazil delivered a third consecutive 150-point hike, while the Czech Republic lifted its benchmark to the highest in the European Union. Russia, Poland, Mexico and Peru may extend tightening campaigns this week, though some think the Latin American cycle may be peaking.

Economists at JPMorgan Chase & Co. estimate that, by April, rates will have gone up in countries that together produce about half of the world’s gross domestic product, versus 5% now. They expect a global average interest rate of about 2% at the end of this year—roughly the pre-pandemic level.

How Tight?
All of this suggests the biggest tightening of monetary policy since the 1990s. And the shift isn’t confined to rates. Central banks are also dialing back the bond-buying programs they’ve used to restrain long-term borrowing costs. Bloomberg Economics calculates the combined balance sheet of the Group of Seven nations will peak by mid-year.

“The tables have turned,” Bank of America Corp. economist Aditya Bhave wrote in a report on Friday. “The surge in global inflation has pulled forward central bank hiking cycles and balance sheet shrinkage across the board.”

In the process, the pivot may end up having ended a pandemic boom in financial markets that was amplified by loose money.

The MSCI World Index of stocks is down about 5% this year. Bonds have plunged all over the world, sending yields higher.

What has forced the central-bank rethink is a wave of inflation. It’s driven by a disconnect between surging demand in post-lockdown economies and shortages in the supply of some key commodities, materials and goods—as well as workers.

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