The writer is chief economist of G+ Economics

Central banks have made heroic efforts to achieve a rhetoric of normality in bringing rates up from emergency lows. But this comes in a world still gripped by the Covid pandemic, while coping with a war in Europe and dislocated commodity markets.

This is a Herculean task, beyond the capacity of most central bankers, to avoid economic disaster and enable a soft landing into a new normality.

Much more is asked of central banks today than in the early days of Covid. Back in 2020, their policies could focus on the objective — without any reliable forecasts — of achieving a speedy bounce in global nominal gross domestic product to a self-sustained, full-employment recovery.

But now, after the global vaccination programmes and waves of new virus mutations over the past year, the banks face the unenviable task of feeling their way towards a “new different” for economies. Bankers wish to avoid stifling a self-sustained recovery without allowing accelerating inflation to take hold.

A margin of error was inevitable. So great was the early Covid economic shock — and the costs to society and public finances — that central banks felt compelled to calibrate policy to restore growth potential.

This remained the aim, even as the social effects of government Covid mitigation and supply-chain disruptions wreaked havoc on consumption and investment across sectors and geographies. Inflation volatility followed, matching the stop-go growth shocks.

Lack of visibility about the duration of the pandemic — or what typical labour markets and trade links would look like — meant policy needed to lean toward risk mitigation.

After all, higher inflation can be an interim policy choice when central banks have plenty of room to respond by raising rates. Also, in a young recovery, higher prices can act as an economic rebalancing mechanism to incentivise expansion of supply capacity and broaden the growth base from consumption to investment. While hardly a risk-free strategy, interest rates are a tool that’s available.

Secular stagnation, however, does not offer a policy choice. The depression-size pandemic shock was preceded by a decade of weak investment and productivity growth, following the global financial crisis and the last great recession. Moreover, policy interest rates already sit at zero, after a decade of quantitative easing, making it hard to provide the necessary stimulus.

The magnitude of the risks that central banks face as a result of Russia’s war on Ukraine, however, is of a very different order, both for long-term inflation and growth potential.

The west’s unprecedented sanctions against Russia have taken the largest exporter of energy, plus key industrial and agricultural raw materials, off the financial grid of the world.

Boycotts by western consumers, businesses and governments mean banks have stopped financing Russian trade, while ports refuse to unload cargoes.

As physical disruptions appear, coping with higher-for-longer energy costs will become as important to managing economies’ health as managing supply. In effect, these cost surges amplify the stagflationary shock of Covid supply-chain distortions.

Surging global supply costs mean central banks now have even less power to bring down decade-high consumer price readings. They also cannot easily provide stimulus to businesses further down supply chains that are forced to ration production. Finally, it is harder to restore the spending power of consumers enduring a speedy erosion of their pandemic savings and living standards.

Rerouting Russian exports, and global commodities trade, will dictate new, longer supply routes, and new, higher global trade prices — in a word, deglobalisation.

That means a lasting shift towards a higher equilibrium for raw material prices, and a structural step change in what businesses and households spend on energy, metals and food.

With oil prices already far above all major central banks’ targets for price stability, the only way to lower inflation is via demand destruction.

But this means an impossible trade-off, at a time when government budgets face surging financing costs and households struggle with their own finances.

With the global financial system becoming ever more fragile in a high inflation, high debt and geopolitically insecure world, managing in the “new different” while avoiding extreme economic volatility will be policymakers’ greatest challenge yet.