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What do you prefer, “gradually” or “orderly”?



This is the kind of discussion between Euro-central bankers nowadays about interest rate policy, when the EZ inflation rate equals 8% in the EZ as in the US.


Of course, nowadays inflation is not limited to monetary factors, it includes a cost-push inflation. Central banks have no power over supply-chain bottlenecks. There is a combination of both of this type of inflation. Nevertheless when Treasuries are selling TB to banks their bank accounts are credited, the Treasury spends this money and it is a source of an increase in money supply.


When you have 8% inflation rate in the EZ as in the US, generally the monetary policy consists 1) to stop QE, 2) to stop recycling loan amortization from governments and 3) to raise the CB interest rate. Instead of being clear on these objectives, the ECB is procrastinating. The ECB’s interest rate is today -0.5% (so -8.5% in real terms) whereas it is in the US 1.5%.


The result of the ECB’s emergency meeting (June 15), the governing council was to study a “new anti-fragmentation instrument”. Even if we don’t know anything about this “new instrument”, it is not difficult to see that it will have the objective to narrow artificially the widening spread between Germany’s interest rate and of some fragile countries. This “new instrument” will be nothing else than traditional QE limited to the most indebted countries. At the beginning Greece and Italy; and then Portugal, Spain and France. It will be difficult for the ECB to show that this is monetary policy, this will be targeted subsidies to some countries unwilling to adjust. This is the role of the European Stability Mechanism and the IMF to lend to countries with excessive debt burden.


“When poor policies rather than bad luck are the driver, ECB bond purchases need to come with conditions attached. This is how the Outright Monetary Transactions facility was designed in 2012.” N. Roubini, FT, June 17, 2022 The ECB is forgetting its mandate to maintain an inflation rate around 2%, not 8%. The normal instrument for fighting against inflation is not more “selective” QE which will increase inflation pressures but to really stop QE and raise interest rates.


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