ECB in Sintra. How to control inflation without further harming the economy?

The motto of the annual forum of the European Central Bank (ECB), which started yesterday in Sintra and will last until the end of tomorrow, is how to conduct good monetary and interest rate policy in a rapidly changing world, today overshadowed by a new crisis.

Christine Lagarde, who welcomed dozens of guests to the ECB Forum yesterday (Monday the 27th), admits that the task of central banks is demanding and that it is necessary to read the signs even more closely.

Inflation started to pick up in the latter part of last year with restrictions in the supply of several basic commodities (agriculture, IT components, energy), but in February the Russian war against Ukraine exacerbated this situation of sharp restriction on world trade.

Inflation skyrocketed and inevitably (in light of the treaty governing the ECB’s mission) interest rates began to rise.

This year’s ECB forum, which is again face-to-face after two years of the pandemic, will focus precisely on these “challenges”: how to control inflation and bring it back to 2% (the medium-term target of the ECB), interest rates, but without derailing the economy.

To curb inflation without seriously hurting wage purchasing power, without sinking the most indebted families, corporations and governments, those most dependent on imported energy, without creating unrest in the market and, inadvertently, fuel financial and banking instability.

In short, how can the central bank prevent economies from being on the brink of a demand crisis that pushes them (in this particular case the eurozone) into stagnation or even recession. And where inflation has yet to be tamed.

Signs of stagflation looming are mounting as the war in Ukraine continues.

Lagarde gifted the first act of this ECB forum to two London Business School (LBS) economists, Hélène Rey and Richard Portes, to dissect the problem of “threats to financial stability” at the moment we live in.

Rey pointed to the problem of the lack of fiscal unity and harmony between the eurozone countries, which he says complicates the ECB’s task.

“We are a monetary union, but we are not integrated at the budget level and therefore we have heterogeneity in credit risk”, i.e. countries that are less strong from a public accounts point of view and with greater market risk (such as Southern Europe) are faced with generally higher interest rates compared to the so-called rich (such as Germany, the Netherlands, etc.), the LBS professor pointed out.

This Tuesday (28th) the ECB president will update her assessment of the situation of prices, interest rates, monetary policy and the real economy, after the rather pessimistic speech at the beginning of this month when she announced the start of the interest rate hike on July 21. And the termination of all unconventional programs for the purchase of government debt and other assets.

When the markets reacted badly and interest rates in Portugal, Italy and Spain rose as a result, the ECB had to step back and put in place a protective shield for the most indebted countries or countries more sensitive to the crisis. phasing out policy of the ECB .

The ECB Forum will also discuss other topics that are equally important and topical.

The labor market problems, which arise from robotisation and are linked to wage formation (especially when they rise and can fuel inflation); imported inflation due to rising energy costs; digital/virtual currency projects and the role of the euro in these markets; the risk of new housing crises.

The Forum ends Wednesday with a debate between Lagarde and Jerome Powell, chairman of the United States Federal Reserve (the world’s largest central bank), Andrew Bailey, governor of the Bank of England, and Agustín Carstens, director general of the Bank of Settlements International.

Author: Luis Reis Ribeiro (cash)

Source: El heraldo

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