Everybody knows how bad the situation is by now. Almost every country in the world records higher inflation month-by-month, and it is not stopping. Only central banks can tame it by raising interest rates and tightening the economy.
Inflation is the worst in decades
While many central banks hiked interest rates, ECB is far behind. Fed started lifting rates in March from 0.25% to 3.25% in September. Although Fed hesitated for months, it was able to hike interest rates before inflation reached double digits. While inflation in the US is not drastically reversing, it is definitely slowing down, from 9.1% in June to 8.3% in September. However, the same cannot be stated about Europe.
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Countries all over Europe record sky-high inflation levels because of the ongoing energy crisis and low interest rates. ECB is far behind Fed with the current key rate at 0.5%, and thus it has a lot of catching up to do. In order to bring inflation down, the interest rates will have to be lifted several times by 50bps or 70bps. As the European Central Bank has meetings every six weeks, the process of taming the inflation level may take longer than we think.
Philip R. Lane, Member of the Executive Board of the ECB, said after ECB raised interest rates by 75 bps in September:
“This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to our two per cent medium-term target. Based on our current assessment, we expect that this transition will require us to continue to raise interest rates over the next several meetings.”
Inflation in Euro Area reaches a record-breaking high of 10% for the first time in decades. Yet, this is just an average. Some countries battle with even higher numbers. For example, inflation in Poland increased to 17.2%, the highest level in 26 years and far more than the 16.5% market expectation. Portugal is luckily under average, but still, its annual inflation rate rose to 9.3%, the highest level since October 1992. Italian inflation grew to 8.9%, the highest in nearly 37 years.
However, some countries record far above Europe’s average inflation, like Estonia, with 25.2%. Latvia and Lithuania reached a dangerous inflation level of 21%. Hungary, Czechia, Slovakia, and other countries record double-digit inflation, which has already hurt households and middle-class families. Does ECB have a plan to solve this crisis?
ECB started too late
While ECB finally started to tackle inflation, many argue it started late, and this catastrophe could’ve been avoided. The inflation level in Euro Area reached 5% in December 2021, and the first rate hike came nine months after that when it had already doubled to 10%. ECB promises to raise interest rates every meeting, so every six weeks, which should lower inflation, but it will be a tough battle.
“We took last week’s decision, and expect to raise interest rates further, because inflation remains far too high and is likely to stay above our target for an extended period. The new staff projections foresee inflation to average 8.1 per cent in 2022, 5.5 per cent in 2023 and 2.3 per cent in 2024, he added.”
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While the US already records falling inflation levels for a few months, European inflation continues to rise. Of course, Europe is in a worse situation because of the energy crisis, but if ECB had acted sooner along with Fed, the situation could’ve been better. The Russian-Ukraine war also needs to be resolved so the energy crisis is solved and the situation improves.
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