Monetary policy facing a conflict of goals as in the 1970s


The European Central Bank will again decide on the key interest rate on Thursday.

(Photo: dpa)

Berlin, Frankfort Soaring energy prices as a result of the Russian invasion of Ukraine have pushed inflation expectations in the euro area to record levels. The barometer for long-term inflation expectations in the 19-country community, the so-called five-year-five-year forward, temporarily climbed to more than 2.40 percent on Wednesday. That’s the highest level according to data from Refinitiv going back to 2013.

The value means that investors on the stock market expect an inflation rate of just over 2.40 percent between 2027 and 2032 on average. This would clearly exceed the inflation target of the European Central Bank (ECB), which is two percent.

Consumer prices in the euro area last rose by 7.5 percent in March as a result of the massive rise in energy prices. Energy prices even jumped by 44.7 percent.

The leading economic research institutes believe that the central banks are faced with a difficult balancing act in view of the high inflation and gloomy economic prospects. According to the researchers, with the outbreak of war in Ukraine the economic prospects have deteriorated and at the same time inflationary pressure has increased noticeably.

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“Monetary policy is thus faced with a conflict of objectives between price and production stabilization, similar to the one that occurred in the course of the two oil price shocks in 1973 and 1979,” says the report for the federal government published on Wednesday.

ECB decides key interest rate

The institutes expect the US interest rate to be raised gradually to 2.75 percent in the fourth quarter of 2023. “The European Central Bank is tightening its monetary policy more cautiously,” the spring forecast continues. An increase in key interest rates in the euro zone is not expected until the fourth quarter of this year. The researchers predict that the main refinancing rate will then probably be increased further to 1.0 percent in 2023.

The European Central Bank (ECB) will again decide on the key interest rate on Thursday. Observers expect the monetary authorities to remain on hold for the time being. The so-called deposit rate – a kind of penalty interest for hoarding money at the ECB – has been at minus 0.5 percent for years, while the key interest rate also remains at a record low of 0.0 percent.

However, the Governing Council is keeping the door open for an increase. He stands ready to adjust “all his instruments” if necessary. He wants to ensure that inflation stabilizes at the 2.0 percent mark in the medium term. Most recently, however, inflation was well above the target value at 7.5 percent.

More: Inflation rate in the US climbs to 8.5 percent – ​​the highest level in over 40 years

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