A sort ofIn view of the rapid price increase, the directors of the European Central Bank (ECB) stated that it must Isabel Schnabel Maintain a high level of vigilance against inflation risks. The German currency regulator admitted on Wednesday that the duration of price increases may be longer than originally assumed. The inflation rate will fall in 2022. But in the coming year, the speed and extent of this decline is still uncertain. Therefore, the European Central Bank must be prepared for all possible situations in order to fulfill its mission of stabilizing prices.
It is widely believed that the energy cost and base effect of the 2020 COVID-19 outbreak are driving prices up: “But there is less opinion on the duration of these price drivers and the significance of their appropriate response to monetary policy,” she said. Added. Schnabel therefore stated that the monetary authorities are divided on this issue.
The statement that shocked observers was issued a few weeks before the landmark meeting of the European Central Bank on the future of the PEPP Corona Contingency Plan, which will be held in mid-December. Many experts expect it to expire in March, after which smaller APP plans will continue in one form or another. In view of inflation risks, Klaas Knot, a member of the European Central Bank Council, called for flexibility. We should not make up our minds too early to avoid conflicts with inflationary trends. The monetary authority has agreed that it will not consider raising interest rates until the end of the APP program.
Bond purchases are a signal of interest rate policy
Schnabel now clearly pointed this out. There are good monetary policy reasons to follow this sequence. At the same time, bond purchases will become a signal of interest rate policy. Even if they continue to stay at a relatively low level, this may indicate to the market that interest rate hikes are unlikely. Dortmund economists said that, on the one hand, premature tightening of monetary policy will harm the economy. Schnabel explained that, on the other hand, it is important to “closely monitor” the upside risks to inflation that financial markets have already anticipated.
At the same time, the Eurozone has not experienced a period of weak growth and rising inflation. Some observers portrayed the ghost of stagflation on the wall. However, developments like those caused by the oil crisis of the 1970s have not yet occurred. Therefore, the fear of stagflation is unfounded.
Schnabel said that the euro zone and the global economy are now better able to deal with such price shocks. This is also because consumers have enough money to spend, and the states support economic recovery through budget policies. In the 1970s, the oil cartel OPEC reduced production, causing oil prices to double in two years, leading to economic stagnation, rising unemployment, and a sharp rise in inflation.
Due to the current rapidly rising consumer prices, the term fictitious stagflation has become popular again: the Eurozone inflation rate in October was 4.1%, the highest level in 13 years. According to Schnabel, the story is not over: since the introduction of the euro in 1999, the price increase in November will be the highest.
