A greater “sacrifice” will be required to rein in inflation than in previous bouts of monetary policy tightening, according to ECB officials, who have warned that price hike risks will spiral out of control if mandatory action is not taken.
ECB board member Isabel Schnabel and Banque de France governor François Villeroy de Galhau said on Saturday that European monetary policy must remain tight for a long time.
The statements made by central bankers from around the world at the Jackson Hole meeting in Wyoming, USA, repeated the words of Fed Chairman Jay Powell on Friday. He swore he would “continue” lowers inflation.
The pace of price growth is advancing at a level not seen in many advanced economies for decades.
“As globalization of inflation makes it more difficult for central banks to control price pressures, central banks will face a higher rate of sacrifice compared to the 1980s, even if prices will respond more strongly to changes in local economic conditions,” Schnabel said. aforementioned.
The victim ratio measures how much central banks must suffer in terms of weaker growth and lower job creation in order to bring inflation back under control.
Villeroy said there should be “no doubt” that the bank is willing to raise rates beyond the neutral rate, which neither helps nor restrains growth. He estimated that rate to be between 1 and 2 percent. Noting that he could reach this level “before the end of the year”, Villeroy said, “Our will and capacity to fulfill our mandate is unconditional.”
Eurozone inflation is expected to hit a new record of 9 percent in the period leading up to August, when the latest data will be released on Wednesday.
Schnabel called for “strong determination to quickly return inflation to target”. One central bank added that “the costs could be significant if it underestimates the persistence of inflation and is slow to adapt its policies as a result – as most of us have done in the past year and a half.”
this ECB It ended eight years of negative interest rates last month by raising the deposit rate by half a point to zero. Some members of the 25-member governing council are urging it to consider going further at its meeting on 8 September, an increase of 0.75 percentage points.
A former German economics professor who joined the ECB’s board of directors in early 2020, Schnabel is one of the central bank’s most influential voices on policy as head of market operations. “Unprecedented pipeline pressures, tight labor markets and remaining constraints on aggregate supply threaten to feed an inflationary process that becomes harder to control as we move more hesitantly on it,” he warned.
Stating that inflation expectations are rising among public and professional forecasters, many of whom expect prices to continue to rise more than the ECB’s 2 percent target for several years, Schnabel added that the credibility of the institution is at stake.
“Both the probability and cost of the current high inflation settling into expectations is disturbingly high,” Schnabel said. “In this environment, central banks need to act strongly.”
Villeroy, often a centrist on the ECB governing council, echoed the hawkish tone. But the head of the French central bank said he favored “another important step in September”, saying he still thinks a 0.5 percentage point hike next month will suffice.
Comments come a day after Powell reset expectations It’s about how much and for how long high interest rates in the US may need to rise, as the Fed grapples with extreme price pressures caused in part by supply-related factors as well as excessive demand.
The US central bank governor warned that efforts to cool the economy will likely require a “continuous period” of lower growth, a weaker labor market and “some pain” for households and businesses.
Like his ECB counterparts, Powell said the Fed is unlikely to halt its tightening cycle any time soon, saying failure to successfully contain inflation will result in higher costs going forward.
In response, Bank of Japan Governor Haruhiko Kuroda, speaking from the audience in the Q&A of the Jackson Hole panel, explained why his country has not aggressively tightened its monetary policy.
“We have no choice but to continue monetary easing until wages and prices rise steadily and sustainably,” he said. Kuroda predicted that Japanese inflation would approach 3 percent by the end of this year and then fall to 1.5 percent next year.
