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ECB’s one-size-fits-all approach in monetary policy still needs to be worked on

Autor: Article based upon analysis from Reuters Breakingviews | Link: Europe’s diverging prices complicate ECB’s task
Timp de citit: 2 minute

While prices are rising by 7% y-o-y in France, in Estonia things are in the opposite corner, with an annual pace of 22%.

Germany is somewhere in the middle, with a 12% increase recorded in October. All in all, the euro zone’s inflation rate stood at 10.7% last month against the same period last year.

With all these disparities, the European Central Bank is on a tightrope while navigating its policy of higher rates.

What could fit some, could pose risks of economic imbalances for others. Unfortunately, ECB does not have the option to apply different measures.

The energy prices only exacerbated a problem that was there since the Pandemic.

Covid-19 lockdown policies had different effects on the eurozone bloc because they were differently applied, same as vaccination rates or the level of government support.

Prices fell during staying-at-home days, due to lower consumption. But when economies began to grow again prices rose faster in countries that depended more on consumer spending.

Now differences in the energy mix add to the bigger picture. In August, retail energy prices in the euro area were 40% higher than a year earlier.

Differences between eurozone countries once again come into the spotlight.

While in Malta energy makes up 6.7% of the price index, in Latvia it counts for 16.2%, according to the Organization for Economic Co-operation and Development, cited by Reuters.

Also, differences in core inflation, which strips out energy and food, widened in the last two years – from 4% in France to more than 14% in Slovakia.

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ECB has announced last Thursday a new jumbo hike of interest rates in a bid to bring down record inflation in the eurozone.

It marked the third hike this year for the 19 EU countries that use the euro.

The central bank’s interest rates have a cascading effect across the zone and directly influence the rates that commercial banks offer to households and businesses.

Policymakers agree that it should hike its key rate quickly until it reaches a “neutral” level that neither stimulates nor constrains the economy.
That level has been estimated by some central bankers at around 2%, which could be reached by year-end.

The bank’s three key interest rates were each bumped by three-quarters of a percentage point.

The ECB „expects to raise interest rates further” and will base its future moves on the „evolving” economic outlook, the organization said in a statement after a meeting of the Governing Council.

„Inflation remains far too high and will stay above the target for an extended period,” it noted.

But lower-inflation countries, led by France, might argue that the ECB needs to pause. While higher-inflation ones will want to keep hiking rates until inflation is subdued.

That’s an old debate in the ECB’s Governing Council between the Northern countries of the bloc and the ones from the South, having its roots back in the 2011 debt crisis.

While forecasts show that, at best, the eurozone economy will be flat next year, further rate increases may turn the ECB into the scapegoat of the impending crisis.