Central banks asleep at the wheel as inflation spirals, Brazils Guedes

Brazil’s economic minister warned Friday that Western central bankers are “sleeping at the driving wheel” as economies slip deeper into a high inflation environment.

Speaking to CNBC’s Geoff Cutmore via videoconference at The Davos Agenda virtual event, Paulo Guedes said that the inflation “beast” is already loose and set to become a real problem.

“My fear is that the beast is out of the bottle,” Guedes told the panel.

“I think the central banks are sleeping at the driving wheel. They should be aware, and I think inflation will be a problem, a real problem very soon for the Western world,” he said.

Far from being transitory as some central bankers have suggested, Guedes said that inflation could be a long-term issue for Western governments, who have left themselves little room for maneuver.

“I don’t think inflation will be transitory at all,” he said. “I think these supply adverse shocks will fade away gradually, but there’s no arbitrage anymore to be exploited by the Western sides.”

Brazil, for its part, moved early to stem the worst inflationary pressures by winding down its Covid stimulus packages last year, Guedes said.

Brazil’s economy briefly returned to pre-pandemic levels in 2021 before slipping lower again.

“We took advantage of the recovery to remove, gradually, the monetary and fiscal [stimulus],” Guedes said, adding that the government has room to react should another coronavirus wave emerge.

Guedes’ comments contrast with those central bankers who argue that current levels of inflation are, indeed, transitory and containable.

Also speaking at The Davos Agenda Friday, European Central Bank President Christine Lagarde said inflation in the euro area was unlikely to worsen dramatically, arguing that the recent surge was due to short-term pressures such as supply bottlenecks and energy prices.

Meantime, U.S. Federal Reserve Chair Jerome Powell is widely expected to hike interest rates at the central bank’s next meeting in a bid to stem rising inflation. It follows similar moves by the Bank of England in December.