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ECB raises interest rates: monetary policy in thick fog

Nicholas by Nicholas
October 27, 2022
in News
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DMonetary policy is not only in a difficult phase in the euro zone. Inflation is proving to be more persistent than desired; at the same time, prospects for economic growth deteriorate significantly. The scenery is increasingly reminiscent of the situation around half a century ago, when a steep rise in oil prices after the Yom Kippur War favored a period of significantly higher inflation rates.

As was the case then, there are increasing numbers of governments who expect monetary policy to be geared more closely to slowing economic growth. These demands stand in striking contrast to the concern many people feel about high inflation. They also contradict the experience of the oil crisis. Monetary policy should ignore government demands and focus on their fight against inflation.

Monetary policy difficult years ago

The Central Bank Council of the European Central Bank has therefore done well to raise the key interest rates significantly again, to hold out the prospect of further key interest rate increases and to initiate a slow reduction in the ECB’s much too large balance sheet total. However, the Central Bank Council must also find the strength to stay on the path it has taken in the future. In view of an inflation rate of 10 percent, a key interest rate of 2 percent can by no means be regarded as an expression of an excessively tight monetary policy. And since monetary policy does not take effect immediately, but only with some delay, the inflation rate will remain very high for the time being.

The longer-term prospects remain hidden behind dense clouds of fog due to the great economic and political uncertainty. It is possible that higher key interest rates, a weaker economy, falling energy prices and easing in world trade will lead to noticeably lower inflation rates in the coming year. On the other hand, in a thought-provoking article in Foreign Affairs, economist Ken Rogoff has proclaimed a new era of inflation. Monetary policy faces difficult years.

  • Christian Siedenbiedel

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Tags: ECBmonetary policypolicy raterate hike

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