Central banks around the world are grappling with the difficult task of managing excess inflation while maintaining economic growth.
In recent years, the European Union (EU) central bank has faced a triple dilemma, requiring delicate balancing acts and strategic decisions as persistently high inflation threatens to paralyze the economy.
The triple dilemma
Carsten Brzeski, head of global macro at ING Bank in the Netherlands, succinctly summed up the challenges facing the ECB in the near term:
“All central banks are grappling with the same triple dilemma: how to balance a slowing economy, still-excessive inflation and the delayed impact of unprecedented rate hikes.”
Another common trend among ECBs is that they are close to the peak of interest rates. This proximity complicates the dilemma described above. When interest rates are already close to the peak, the central bank has less room to maneuver in response to changing economic conditions.
This limited flexibility means that the central bank must be more cautious in its monetary policy decisions. The recent surge in oil prices has complicated the situation. Higher oil prices will have a dual impact on the economy.
On the one hand, they can fuel inflationary pressures by increasing energy costs, which can ripple through various sectors of the economy. On the other hand, higher oil prices can drag on economic growth by increasing production costs and reducing consumers’ spending power.
The issue puts central banks in a difficult position. They must carefully assess the likely inflationary impact of higher oil costs, as well as the negative impact on economic growth. Deciding whether to tighten or ease monetary policy in response to oil price volatility requires a complex balancing act.
Central banks around the world, outside the EU, deal with uncertainty
Central banks around the world are struggling with the difficult task of managing excess inflation while maintaining economic growth. For example, the Bank of England recently chose to pause after 14 consecutive rate hikes, with the main policy rate stabilizing at 5.25%.
The decision was a close call, with five MPC members voting to keep rates unchanged and four in favour of a further 25 basis point increase. Lower than expected August inflation figures (6.7% year-on-year) may have influenced the decision. While still above the BoE’s 2% target, it was below the 7% forecast.
In Switzerland, the SNB chose to pause for the first time since March 2022, citing the sharp tightening of monetary policy in recent quarters to address remaining inflationary pressures. Swiss inflation was 1.6% in August, within the national target range of 0-2%.
SNB President Thomas Jordan stressed that "the war against inflation is not over yet," hinting that further tightening is possible in December. The SNB forecasts that annual Swiss inflation will average 2.2% in 2023 and 2024, and 1.9% in 2025, assuming the policy rate remains at 1.75%.
On September 14, the ECB raised its enhanced interest rate by 25 basis points, meaning that interest rates have peaked. The ECB noted that maintaining these interest rate levels would contribute significantly to a timely return of inflation to its target. However, the bank did emphasize that interest rates would remain at an appropriately restrictive level for as long as necessary. #通胀 #欧盟
