The global macroeconomic picture has become enormously complicated in recent weeks. Putting out the fire of skyrocketing price growth requires broad and decisive measures in energy, income, fiscal and monetary policy. You will need quite a few quarters, skill in the actions and luck. Until now, the Federal Reserve and the Bank of England have clearly entered the trenches of the battle against inflation through rate hikes, stimulus withdrawal and very hawkish messages. Although it no longer rules out rate hikes and has announced the end of the pandemic stimulus in a few months, the European Central Bank (ECB) is more cautious, sometimes diplomatic.
Inflation requires that all the meat be put on the grill. The ECB has a decisive role to play in achieving this. His mandate obliges him. The pace and intensity of possible rate hikes in the eurozone remains to be decided. It is evident in the not perfectly aligned statements of the two heads of the ECB, Lagarde and De Guindos. The issuer cannot overbrake and ruin the recovery. Nor can it allow inflation to become anchored in expectations, generating a price-wage spiral. Failing to act or coming up short can make inflation worse. Don’t be afraid to act on guys. It was done normally until the 2008 crisis. All the agents and the market expect it to be done this way. It would be worse if events outweighed the ECB’s action. Also, rates have already been rising in the markets for some time.
The rise in rates is more effective with inflation derived from strong demand, as is the case, to a greater extent, in the US. There is also a demand component in the eurozone, as the core one is beginning to reflect, but inflation due to energy costs weighs more . The GDP growth expected this year proves it. It is necessary to support this recovery by controlling inflationary excesses. The rise in rates would contribute to other fiscal and income policies. There will be effects, especially on the indebted, which will have to be evaluated. But, for example, families cannot expect to pay 1% on a mortgage if inflation remains above 5% and leads to “very negative” real rates. And companies cannot continue borrowing at these levels of inflation without it being reflected in their nominal financial cost.
Everything that happens —the greatest scarcity— must be reflected in prices and costs, including financial ones. What to say about sovereign debt, a great source of concern. An ECB program that allows purchases and prevents risk premiums from skyrocketing will be necessary. It would generate credit fragmentation in the euro zone and another spiral of problems. Of course, with the correct incentives within the ECB’s mandate, with a serious commitment from the States to contribute to the control of inflation and fiscal sustainability. Inflation is not going to be free for anyone.
He knows in depth all the sides of the coin.
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