The European Central Bank (ECB) must ignore turmoil in the banking industry and continue raising its key interest rate to beat back inflation, a majority of the bank’s governing council members agreed at their 16 March meeting, the Financial Times reported.
The financial world was shaken in March by the simultaneous collapse of the Signature and Silicon Valley banks in the U.S. and Credit Suisse in Switzerland.
Some economists argued that the resulting tumult in the banking sector would cause banks to tighten lending, which would have the same effect as a rate hike: lending would slow and consumers would buy less, driving down prices.
However, many ECB officials urged the central bank to assess the need for a rate increase separately from the impact of the banking sector’s ills, minutes of last month’s meeting show.
The bank is expected to lift its key rate next month. Whether the increase will be a quarter or half point depends on data, some ECB officials said to reporters.
“Unless the situation deteriorated significantly, financial market tensions were unlikely to fundamentally change the governing council’s assessment of the inflation outlook,” the bank said in a statement.
“In light of the risk of persistent inflation dynamics, the ECB’s monetary policy had to be persistent as well,” it added.
Also, some committee members scoffed at projections that inflation is on track to fall to 2.1 percent in 2025, calling the notion “immaculate disinflation.”
Inflation ran higher than predicted in February and “the strengthening of wage growth was consistent with second-round effects already having started,” they said.
Higher wages indicated that worker pay is beginning to chase prices, which could lead to a wage-price spiral that would be hard to stop.
Loose fiscal policies by European governments also could continue to fuel inflation, they noted.
After March’s meeting, ECB president Christine Lagarde said that fighting inflation and maintaining stability in the financial sector are not conflicting priorities.
A minority of committee members contended that “the risks from not raising rates, if tensions [in the banking industry] turned out to be short-lived, were assessed to be much less severe than the risks of raising rates into a persistent crisis,” the minutes showed.
TREND FORECAST: As new data shows, the European Union’s economy is not yet in a recession, but a fraction of a percentage point less in growth could tip it closer to one.
Another ECB rate hike could give it that push, especially combined with the slowing global economy, the war in Ukraine and Western sanctions against Russia, and the central bank’s withdrawal of support for the bond market.
Current problems might have been avoided if Lagarde and the ECB had confronted inflation when it began. Instead, as we wrote in “ECB Fears Inflation Will Last For Years” (12 Oct 2022), Lagarde said in November 2021 that it would be “wrong” to raise interest rates then because inflation will begin to cool by the time the new rates would have a chance to impact the economy.
On 3 December 2021, she told the Financial Times that inflation was peaking and that the inflation profile looked “like a hump…and a hump eventually declines.” She said at the time that the ECB is “very unlikely” to alter its interest rate—which by then had remained negative for seven years—in 2022.
The energy crisis created by the Ukraine war and Western sanctions will prolong not only inflation, but also the probable recession, realizing the ECB’s fears that inflation will become embedded across the economy.
And totally absent in their analysis is that the ECB and nations are responsible for inflation by keeping interest rates into negative territory for eight years, buying corporate and government bonds…and printing trillions in fake money to fight the COVID War.