Central banks originally emerged from European wars. The credibility these institutions provided allowed sovereigns to fund themselves more cheaply than their rivals, giving them an advantage in funding warfare. That legacy does not make the dilemma facing central banks over how to respond to Russia’s invasion of Ukraine any easier. The European Central Bank, which met last week, and the Federal Reserve and the Bank of England, which will both make monetary policy decisions this week, must decide how to cope with high inflation, the risks of a recession and the spillover effects from the war on the financial system.

Even before Russia invaded Ukraine, central banks were set to tighten monetary policy in the face of a “supply shock”. While the ECB was a comparative laggard in its plans to raise rates, policymakers had already conceded the point that restrictions on energy supplies and pandemic-related trade disruptions merited a monetary policy response. Now, with Europe facing even higher inflation, it is no surprise that the balance has tilted even further towards those who put more emphasis on limiting inflation through tighter policy than those who emphasise the benefits of cheap money for supporting economic growth.

The Covid-related lockdown of Shenzhen, the Chinese technology hub, will only add to the inflationary woes by putting more pressure on global supply chains that were already dealing with bottlenecks. The initial onset of the pandemic combined a supply-and-demand shock to the world economy, reducing consumer and investment spending as well as the capacity to produce goods and services. Today, the lingering impact of coronavirus is almost entirely on the “supply side”.