The ECB is bracing itself against the high inflation, but at the same time is slowing down the rate hike. The monetary authorities are in a dilemma.
These are big, reassuring words emblazoned on the European Central Bank’s (ECB) website. “We ensure stable prices and safe money,” it says there. And: “We keep inflation under control.”
But do the central bankers really do that? In fact, many Germans are likely to have a different impression.
Prices are still rising, especially in supermarkets. Although energy prices, which are actually the most important driver of inflation, have recently fallen, food is becoming more and more expensive.
And the so-called core inflation, which excludes price increases for energy and food, is stubborn in Germany and the euro zone. Unlike overall inflation, it is hardly going down, and many services in particular, such as visits to the hairdresser or car washes, are becoming more and more expensive.
Permanent inflation and weak euro?
So there are doubts about the promises made by our currency watchdogs, not least because wages have also risen sharply recently. Experts are now increasingly speaking of the dangers of a wage-price spiral, a scenario in which companies justify higher prices with higher wage costs – which in turn could lead to higher wage demands. A possible consequence: permanent inflation and currency collapse.
For the ECB’s top staff, it was – once again – the whole thing this Thursday when they met for the regular interest rate meeting. It was already clear in advance: Now it’s going to be tight. The line that monetary policy walks is a fine one.
Because if the ECB does not do enough to combat inflation, if it raises interest rates too little, inflation threatens to spiral out of control – with the consequences just outlined. Conversely, if it puts too much pressure on interest rates, there is a risk that the economy will stall because loans are becoming too expensive, nobody can build houses anymore, and companies stop investing.
An open-ended experiment
A classic dilemma, the core of which is: It is extremely difficult to forecast economic development and inflation. The turnaround in interest rates is like open-heart surgery. In other words, it’s an experiment in which the chemicals are clear, but no one knows what the mixing ratio is.
And everyone is affected. Everyone inevitably takes part. Outcome uncertain.
The most recent interest rate meeting, the decision to raise key interest rates by 0.25 percentage points, is a further step in this experiment. It shows that ECB President Christine Lagarde and her colleagues are looking for a middle ground. Not too much, not too little, hopefully we were right later in retrospect.
According to many experts, this was not always the case in the past. Even some ECB representatives are now making it clear that the turnaround in interest rates should have started much earlier and not just last summer, when the Russian invasion of Ukraine had already been driving up energy prices for several months.
Lagarde wants to keep her promise
Whether it was right to raise interest rates by just 25 basis points instead of 50 three times in a row remains to be seen. One thing is certain: With the interest rate step that has now been decided, there is hardly any sign of an end to the interest rate experiment. The members of the Governing Council of the ECB will have to raise interest rates significantly at least once, and more likely two more times.
And even then it remains to be seen whether that will be enough – and what consequences this will have for home builders, companies and the labor market: the federal government has recently revised its economic outlook slightly upwards for the current year.
At the same time, however, some experts warn against too high expectations. Quite a few things: In the second half of the year, after the expensive summer vacation, many consumers will probably realize that they need to limit their consumption. Even higher interest rates could then overwhelm many people.
Still, Christine Lagarde appeared determined on Thursday to keep the promise she made on the ECB’s website. When asked whether the central bank could take a break from the rate hike, she said at a press conference: “We’re not pausing. That’s very clear.”
