European Central Bank is Sticking to its Loose Monetary Policy

Regardless of the high rate of inflation, the European Central Bank is sticking to its loose monetary policy. It expects inflation to decline in 2022. Many economists believe that the ECB is underestimating the development.

The travel industry is one of the industries that is currently driving prices up significantly across Europe – as is the entire service sector. But not only that: petrol and heating oil, a lot of food and increasingly electronic devices are particularly expensive. g. ECB considers high inflation to be a temporary phenomenon Overall, the inflation rate in the euro area rose from 2.2 percent in July to 3.0 percent in August – the highest Value for around ten years. The inflation rate.

Despite this development, the ECB sees no reason to act. It is true that “the citizens of the Eurozone are now clearly feeling the price increase,” admitted ECB President Christine Lagarde at the press conference after the ECB Council meeting.

The inflation forecast for this and the next two years has also been raised. Accordingly, it should be 2.2 percent this year. Nevertheless, the monetary authorities believe that this development is only temporary, said Lagarde, and that the price increase will decrease significantly again in the coming year. According to the new ECB forecast, it should then be 1.7 percent, and drop to 1.5 percent in 2022 – all of this would be within the scope of the self-imposed target of an inflation rate of two percent.

Critics expect higher inflation than in previous years, but the ECB’s forecasts have so far only rarely been correct. Their models have been far too optimistic for years and usually lag behind real developments. More and more critics are speaking out.

The climate debate is also developing into a price driver. The CO2 taxes, but also other climate protection measures, will continue to drive energy prices up in the coming years.

The high inflation is also causing wages to continue to rise. The unions are already flexing their muscles. In many European countries, wage developments are automatically linked to the inflation rate. In Spain, for example, wage rounds of up to seven percent are currently not uncommon. All of this leads to more consumption, but also to higher inflation. Many observers fear a wage-price spiral like in the 1970s and accuse the ECB of not adequately incorporating these developments into its models. In fact, ECB President Christine Lagarde left a back door open and stressed that the ECB with its inflation forecasts readjusted should these developments drive prices up more than expected at the moment.

 

Reviewer overview

European Central Bank is Sticking to its Loose Monetary Policy - /10

Summary

Regardless of the high rate of inflation, the European Central Bank is sticking to its loose monetary policy. It expects inflation to decline in 2022. Many economists believe that the ECB is underestimating the development.

0 Bad!