Saturday, December 2, 2023

The ECB’s tight policy continues to fail to curb inflation

Set inflation at 2% “in the medium term.” That was the compelling message expressed by the president of the European Central Bank (ECB), Christine Lagarde, in the press conference she offered on July 21, 2022 after applying the first increase in interest rates in 11 years and the largest in 22, due to the alarming rise in prices. However, this Thursday, the first break happened.

Almost five months after the start of the war in Ukraine, the central banks began to act and, as usual, the governor of the European banks followed the steps of the Federal Reserve and increased the price of money.

A measure launched when inflation in Spain stood at 10.8% and underlying inflation, which does not take into account unprocessed food or energy products, was at 6.1%. But fiscal policy is absolutely tight until the first stop.

Non-stop climbing

Since the first increase in interest rates, Christine Lagarde has actively and passively defended that a strong hand is needed to achieve the 2% goal. The president of the ECB defended a month before making the drastic decision that the institution he leads will go “as far as necessary” to reduce the price of money.

But 14 months later, things have not improved as the experts expected. In fact, there is a lot of data that exceeds the goals they set.

With interest rates at 4.5%, inflation fell, but the underlying inflation did not have the desired effects and, although they did so following the steps of the Federal Reserve, the new stop questioned the effectiveness of steps.

It is true that the general inflation reached 1.9% in June this year in Spain, below the target of the ECB, but that of the eurozone fell only last September to 4.3%, far from the 2% set.

Using the monetary policy applied in our country as an example, the increase in prices has done better than in Europe as a whole, but the underlying inflation remains very high.

From 10.8% overall inflation in July 2022, it dropped to 3.5% in September data, a drop of 7.3% in a year. However, when comparing the data that does not include unprocessed foods or energy products, the reduction is not significant.

The increase in the underlying prices changed only from 6.1%, when the ECB applied the first increase, to 5.8% registered in the latest updated data, 0.3% in 14 months. Something that sets the alerts up about 10 times in a row.

A slowdown that “should have happened sooner”

The ECB is optimistic in its forecasts and Lagarde assured the press room that “the economy should strengthen in the coming years”, although she also defended that the “cooling has spread” to other sectors. “There are signs that this market is weakening, fewer jobs are being created,” he reasoned.

Something that for some experts is due to the high increase that they have applied in recent months. José Manuel Corrales, professor of Economics at the European University, acknowledged that the stop “must happen as soon as possible.” “There will be 10 interest rate increases since the summer of 2022. It has increased from 0% to 4.5%. This will cause a very negative impact on the economy,” he pointed out.

“The use of rate increases is an orthodox recipe to control inflation, but it has been shown that the effects it can have on control are limited, because they accept other measures that, for example, the Government of Spain has applied , like that. as the Iberian exception, help with public transport or truck drivers. They are too far away, “he justified.

Raising rates is an orthodox recipe to control inflation, but this is too much

José Manuel Corrales, professor of Economics at the European University

An analysis similar to that made by Dídac Cervera, Doctor of Social Sciences and professor at the EAE Business School, who emphasizes that, although inflation is above 4% and far from the 2% goal, we must “look at the trend” and “how the economy is progressing.”

“The economy is cooling down. So the ECB has to play an instrument with interest rates to balance GDP growth and inflation. If one goes, the other sinks. If we continue to raise interest rates, we will enter the economy. The most rational thing has been done,” he pointed out.

Dídac Cervera, Doctor of Social Sciences and professor at the EAE Business School

José Manuel Corrales also said that, if it were not for the echoes of the labor reform, the 10 increase in the price of money would cause “devastating effects on the labor market in Spain.” “This remarkable cooling is seen in other European countries in an alarming way. Germany entered the technical resolution,” he added.

“I think that the orthodox, neoliberal, classic recipes for raising interest rates are useful when the crisis has a monetary base, but the current one is not exclusively monetary, it is more linked to the distribution chain , on the effects of the war in Ukraine. …”, he criticized.

The professor from the European University uses the metaphor of hawks and doves within the Governing Council of the ECB itself. “The hawks want to keep raising it until they get results and the doves want to moderate this rising situation, because it can cause harmful effects on the economy, as it is known in Germany,” he explained.

Keep the type for several months

Experts agree that, depending on what happens in the conflict between Israel and Hamas and the evolution of the war in Ukraine, everything seems to indicate that the institution led by Christine Lagarde may leave interest rates at 4.5% for a few months.

Dídac Cervera predicted that the ECB “will maintain this position for a year, for sure”: “It will not make the economy suffer more and it will allow inflation to continue to fall.”

“They will not lower the interest rate in the medium term, because we have to take into account that inflation has arisen with the issue of the pandemic, a more brutal excess demand has been created and then came the war with Russia in Ukraine and now the conflict between Israel and Hamas, who knows what will happen,” he acknowledged.

José Manuel Corrales thinks the same, but emphasizes the “wrong and contradictory policy at the European level” for raising the price of the currency, at the same time they apply the “fiscal spending measures promoted by the European funds.” “.

“In May 2022, some of us pointed out that this is not the right path, that it is not and, well, unfortunately we are right. The Spanish Government: “The Iberian exception is proposed to control inflation, compared to others who called it the Iberian scam, and it worked.

José Manuel Corrales, professor at the European University

The professor from the European University is committed to “lowering the interest rate”, but not at the same rate of increase, because “there are more difficulties.” He emphasized that maybe “they shouldn’t have been raised at that point,” but he doesn’t believe “this year they will be lowered.”

“In any case, I think we have reached the levels that we should probably see until the end of next year. ,” he said..

The scenarios to be determined in a more uncertain future, but in a present that, for now, has the first brake of the ECB after the biggest increase of interest rates in its history.

World Nation News Desk
World Nation News Desk
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
Latest news
Related news