How do bloated balance sheets of central banks, many of which reached unprecedented levels in 2009, affect inflation?
Worah: Essentially the bloated balance sheets of central banks affect inflation in two ways. The first is the way in which the money moves out of the banks’ balance sheets and into the broader economy, which is not occurring yet. And when it does start to get there, there’s still about a two- to three-year interval between this greater money supply in the broader economy and inflation. So what these bloated balance sheets have done is simply truncate the deflation risk in some countries, which featured highly about a year ago in countries like the U.S. and U.K. In the longer term, the risk these bloated balance sheets pose for inflation is really by way of political interference. Central banks know what they need to do to unwind their balance sheets in a timely fashion once credit conditions normalize in order to control inflation. However, if they have their independence encroached upon or curtailed by political institutions, this could certainly raise inflation risk in the longer ter
