KThe Mannheim economist Klaus Adam finds lar words on the current debate about inflation. “Everything is upside down in the European Union,” Adam wrote on Twitter on Tuesday: “The European Central Bank looks after the solvency of public finances while finance ministers worry about inflation. Weren’t the responsibilities assigned the other way around in the European Treaty?”
On Thursday, the Central Bank Council of the European Central Bank will meet for a regular meeting, at which it will very likely decide to end the bond purchase program that has been in place since 2015 at the end of the month and send out clear signals about increases in the key interest rate in the coming months. The chapter of a currently negative key interest rate of minus 0.50 percent will probably come to an end in the autumn after eight years that have been far too long.
In the management of the central bank, some members had opposed the call for key rate hikes in the near future for a long time. But even as part of a strategy that gives future inflation rates more weight than the current inflation rate, a combination of a current rate of 8.1 percent and a negative key interest rate is simply no longer plausible. In this respect, too, the world is upside down.
Bitter truth underestimated
In a blog post on May 23, President Christine Lagarde tried to channel the debate leading up to the June 9 session. This could be understood as an unusual step because Lagarde, unlike her predecessor Mario Draghi, has so far shown no inclination to curtail the Council’s room for maneuver in advance by taking lonely positions. From her preference for a “gradual” but necessary “normalization of monetary policy” in a difficult environment, many observers have concluded that the President prefers two key rate hikes of 0.25 percentage points each at the Council meetings in July and September, which will lower the key rate in raise fall to zero. In fact, Lagarde is less precise in a situation where several Council members believe an immediate 0.50 percentage point hike in interest rates is worth considering.
These detailed debates for monetary policy connoisseurs underestimate a bitter truth: In view of the dynamic inflation, all interest rate hikes currently being considered by the Central Bank Council will probably not be sufficient to ensure price level stability again in the medium term.
The central banks – and the ECB is not alone here – are ill-prepared for the current challenges. Inflation rates had fallen almost everywhere since the 1990s; by the outbreak of the pandemic, monetary policy had settled into a world with very low inflation rates and was more concerned with economic growth and financial market stability. The central banks changed from currency watchdogs to large insurers against macroeconomic risks; They also opened up to other topics such as climate protection, gender equality and the distribution of income and wealth.
Central banks bear no responsibility for not foreseeing the upheavals caused by the pandemic and war, the use of food and energy as weapons, and the fragility of global supply chains and their consequences for monetary stability. External shocks, as economists call such events, hit economic forecasting models unprepared. But the “good years” for monetary policy, in which inflation rates remained low, had strengthened belief in economic models that apparently made it possible to estimate the medium-term development of inflation, which is relevant for policy, quite reliably: Assuming stable confidence in the The medium-term inflation rate was largely determined by the probable development of the labor market. This was also written in textbooks, but even in the “good years” it only worked to a limited extent.
