ECB raises interest rates again: the right strategy?

In a bid to curb soaring inflation in the Eurozone, the European Central Bank raised the key interest rate again on Thursday, bringing it up to two percent. The hike 0.75 percentage points makes loans more expensive and is meant to cut demand and thus put a brake on rising prices. Commentators debate whether the threat of recession is the lesser evil.

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Handelsblatt (DE) /

Still too little

This latest interest hike will still not be enough, Handelsblatt comments:

“Further decisive steps will have to follow, because the risk of inflation is not diminishing. ... If the knock-on effects of high wage demands are now added to the mix, it will be extremely difficult to counter the dynamic. To restore the credibility it lost by negligently downplaying the inflation risks last year, the ECB will have to do more than increase interest rates. So it's high time to phase out the bond-buying programmes, as announced last year. Unfortunately, the ECB Governing Council is not yet ready to do so.”

Der Standard (AT) /

Use the purge effect

Further interest rate hikes must follow despite the threat of recession, writes Der Standard:

“In any event recession seems inevitable, and it is a reliable means of curbing demand for goods and services - and thus also of easing inflationary pressure. ... Even if politicians avoid recessions like the devil avoids holy water, economists are also aware of their purging effect. Because a decline in economic output also means the exit from the market of unproductive companies that have so far just about managed to keep their heads above water - not least thanks to years of the ECB's zero interest rates and massive Covid bailouts. These policies should now come to an end, because such so-called zombie companies tie up capital and above all manpower which are desperately needed in other areas.”

La Vanguardia (ES) /

A highly complex situation

La Vanguardia can understand the objections from different sides:

“The ECB's objective in making money more expensive is to slow down consumption and investment to force the economic actors to adjust their prices. ... Emmanuel Macron and Giorgia Meloni have already voiced opposition to this because they believe it could lead to a recession and social unrest. ... Germany, on the other hand, is urging the ECB to do everything it can to reduce inflation. Most central bankers agree that a recession is less bad than persistently high inflation. ... The question is whether making money more expensive when a war is going on is the right thing to do. ... But as no one has the answer, they are sticking to the textbook of orthodox monetary policy.”

Hämeen Sanomat (FI) /

Fears of stagflation

The ECB cannot solve the crisis on its own, Hämeen Sanomat points out:

“The worst-case scenario is that central banks will lose control of the economy altogether. Experts are already warning of the rare danger of stagflation - simultaneous recession and high inflation. A tight monetary policy dampens inflation but exacerbates unemployment, the third indicator of stagflation. However, monetary policy alone is not the best means of combating high inflation, which has various causes. Economic policy must rely on a broad range of measures.”

Õhtuleht (EE) /

Not so bad for consumers

Õhtuleht also sees a positive side:

“Hopefully, this time Estonia won't have the kind of credit boom that backfired in the last economic crisis, when the banks took aim at mortgages. There is nothing bad without something good, because rapid inflation accompanied by salary increases actually makes loan repayments cheaper and increases our standard of living. ... Incomes rise even for those who have no credit debt, and the state compensates for the price hikes with payments for children and the elderly, helps with electricity bills and increases pensions.”