First modification:
With the biggest interest rate hike in its history, Europe is following in the footsteps of the US Federal Reserve and other central banks in a global stampede of higher credit prices aimed at quelling record inflation.
When the most orthodox economists are asked what is the best antidote to curb runaway inflation, the answer is almost unanimous: increases in interest rates by central banks.
However, it is a remedy that, many fear, could be worse than the disease itself: by directly impacting consumption, high interest rates tend to cool down economies and, consequently, trigger recessions.
Faced with an inflationary spiral with few precedents in history, the world’s central banks have opted for this option.
During the worst moments of the crisis, central banks kept their interest rates historically low in order to revive the economy through higher consumption. With unstoppable prices, the strategy is now the opposite.
With inflation at a half-century high and approaching double-digit territory, policymakers worry that rapid price growth is taking hold, melting away household savings, thwarting investment and setting off a downward spiral. prices and wages difficult to break.
European Central Bank, lagging behind its peers
After a decade of ultra-low rates, the central bank of the 19 countries that use the euro raised its interest rates this Thursday, September 8, by 75 basis points to 0.75% from 0% last July. , following the steps that the Federal Reserve has walked in the same direction.
Today we took our latest monetary policy decisions:
?We raised our interest rates by 0.75 percentage points – a major step to make sure inflation returns to our 2% target
?More steps will follow. They will depend on how the inflation outlook developshttps://t.co/VzjZYy6qPo pic.twitter.com/8HhFNQdzJA
— European Central Bank (@ecb) September 8, 2022
This is the highest level of increase since 2011 and it means that you will begin to receive interest on the money you lend, as you did not do in a long time. The ECB’s rates even went negative, basically implying that it’s not the commercial banks that are charging for lending money, but rather that they are charging them for holding excess cash.
After raising its rates to an unprecedented level, the ECB also promised more hikes, prioritizing fighting inflation even as it heads toward a possible recession and energy rationing.
But there are those who see this as an ineffective strategy, since central banks are powerless against inflation when it is caused by disruptions on the supply side and not on the demand side.
In other words, there is very little chance that the central banks will be able to drive prices down when the problem is not that there is greater consumption, but rather that there is less supply, as is the case with natural gas in Europe.
Add Comment