How should central banks respond to inflation?
ECB chief Christine Lagarde has admitted that the central bank underestimated inflation in the Eurozone. She said, however, that the ECB expects inflation rates to drop in the current year, meaning that it will have to wait for March forecasts on inflation and the economy before deciding on any changes to its monetary policy. Commentators are for the most part sceptical.
Not the time for complacency
Christine Lagarde has not put enough thought into her rejection of ECB measures to fight inflation, the Irish Examiner is convinced:
“Central Statistics Office figures showed that prices rose 5.5 percent in December, at their fastest pace since April 2001. ... Germany, the bedrock of the European economy, this month posted consumer inflation of 5.3 percent. ... Energy costs are vulnerable to the consequences of whatever happens between Ukraine, Russia, and Nato. ... It would be better if the European Central Bank did not sound quite so complacent.”
Averting financial crisis at citizens' expense
Le Point doubts that the central banks are really set on fighting inflation:
“The truth is that, strong words aside, monetary policy will in fact remain very expansionary in the long term, with real interest rates that remain largeley negative after adjusting for inflation. The pandemic has put an end to the principle of the independence of central banks. Their main task now seems to be to protect states from bankruptcy by financing their deficits rather than protecting citizens' purchasing power by fighting inflation. At the risk of triggering a social crisis to avoid a financial crisis.”
Take the Eurozone's specificities into account
The ECB's cautious approach despite high inflation is in line with the economic situation in the Eurozone, economist Melvyn B. Krauss comments in Le Monde:
“Raising interest rates too fast could tear apart the currency union by pushing up borrowing costs and stifling the recoveries of heavily indebted member states like Italy, Spain, and Greece. Economists call this 'fragmentation risk'. Fragmentation of the currency area is a chronic issue for the eurozone, because, unlike the Fed and the BOE, which both are backed by a single fiscal authority, the ECB operates with 19 independent fiscal authorities.”
Higher interest rates will lead to price stability
Although there is no need to panic, the Bank of England must act now, The Times demands:
“Interest rates remain at historically low levels. They have not stood above 0.75 per cent for more than a decade. Raising them slightly would make little difference to the cost of servicing government debt, or to borrowers servicing mortgage loans, but it would give a signal. ... Inflation is, in effect, a tax on enterprise and savings. The point of inflation targeting is to enable consumers, businesses and investors to take long-term decisions. If they can be confident in price stability, they can discount that source of risk in deciding whether to buy or invest now or later.”