The ECB director also warned of the danger that the population could get the impression that the central bank now has greater tolerance for high inflation rates.
(Photo: Reuters)
Frankfurt According to Central Bank Director Isabel Schnabel, the European Central Bank (ECB) must take vigorous action against the skyrocketing inflation in the euro zone. Both the likelihood and the cost of the current high rate of inflation being reflected in expectations are uncomfortably high, she said at a Federal Reserve symposium in Jackson Hole, Wyoming on Saturday. “In this environment, the central banks must act vigorously,” said the German economist. They must be resolute in tackling the danger of people beginning to doubt the long-term stability of their currencies.
“The longer inflation remains high, the greater the risk that the public will lose confidence in our determination and ability to maintain purchasing power,” Schnabel said. If a central bank underestimates the stubbornness of inflation – which, according to Schnabel, most central banks have done over the past year and a half – and only changes its monetary policy slowly, the consequential costs can be considerable, she warned.
At its interest rate meeting in July, the ECB initiated the turnaround in interest rates and, contrary to what had previously been promised, raised the key rates by a strong 0.50 percentage points. It was the first rate hike in eleven years. The key interest rate is now 0.50 percent. The next ECB interest rate meeting is on September 8th. The stock exchanges are currently expecting a further interest rate hike of half a percentage point. However, in view of the poor inflation prospects, some euro watchdogs have now spoken out in favor of discussing an even stronger increase of 0.75 percentage points at the September meeting.
In her speech, Schnabel also warned of the danger of the central bank becoming more tolerant of high inflation rates. “Decisive action is required to break these perceptions,” said the ECB governor. If uncertainty about the central bank’s reaction undermines confidence in the commitment to safeguarding price stability, a cautious approach to monetary policy is no longer appropriate. “To regain and keep confidence, we need to bring inflation back to target quickly.”
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Inflation in the euro area rose to a new record of 8.9 percent in July. This means that inflation is now more than four times as high as the target of the euro central bank, which is aiming for a rate of two percent in the medium term. Consumers have recently been rather pessimistic about the further development of inflation. In a survey by the ECB in June, consumers assumed that inflation would still be 5.0 percent in twelve months’ time.
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