High inflation in France and Spain will strongly influence the policy of the European Central Bank. This says Karsten Brzeski, chief economist of ING Germany and ECB observer. Inflation in France rose from 6% in January to 6.2% in February, which rose to 6.1% in Spain. “It shows how difficult the inflation situation is.” And the German inflation rate is yet to come.
The problem, according to Brzeski, is that inflation remains stubbornly higher than markets expected. “Inflation is clearly too high for the ECB and that’s why they keep raising interest rates.” According to Brzeski, even though the energy caps ensured that energy prices were artificially kept lower, we see companies “once again passing on last year’s higher energy prices to consumers. And that’s only going to go on for a while.”
‘Central bankers won’t listen to Italy’
Delay
Brzeski suspects core inflation above 5 percent for the eurozone will remain around 5 for the rest of the year, thanks in large part to still-incoming wage hikes. The problem for the ECB is that the interest rate weapon only works after six months: “Monetary policy only works with a lag.”
Tightening
Although according to Brzeski it will take 6 months before the consequences of higher interest rates are visible, the contours are already emerging: ‘If you look at loans, for example, consumer credit, it has clearly decreased. Traditionally, it has taken a little longer before we even see that business loans are clearly declining. So it’s actually kind of a wave of tightening that’s still coming. But at the moment it is clearly too little to reduce inflation in the short term.
Italian disaster
Italy wants the ECB to stop raising interest rates. Logical, the country has a deep debt that weighs more and more on the exchequer. In vain, thinks the chief economist, “the central bankers will not listen to him.”
“They have a mission now and that mission is just downward inflation”
According to Brzeski, it takes ‘a long time for the market and for countries to realize that this ECB really wants to lower inflation’. Despite the impact on Italian 10-year yields and markets. According to Brzeski, the Italian 10-year rate is now almost 5 per cent, if it continues to rise, it is a matter of waiting for the financial markets to return to speculating on a possible next euro crisis. “That’s the danger, but the ECB can now take much less account of it than it did a few years ago.”
“Because now they have a mission and that mission is just downward inflation. And if we don’t make it there, they can close down.”
Source: BNR
Andrew Dwight is an author and economy journalist who writes for 24 News Globe. He has a deep understanding of financial markets and a passion for analyzing economic trends and news. With a talent for breaking down complex economic concepts into easily understandable terms, Andrew has become a respected voice in the field of economics journalism.
