The Governing Council today decided to raise the three key ECB interest rates by 75 basis points. This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to our two per cent medium-term target. Based on our current assessment, over the next several meetings we expect to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.
Inflation remains far too high and is likely to stay above our target for an extended period. According to Eurostat’s flash estimate, inflation reached 9.1 per cent in August. Soaring energy and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks are still driving up inflation.
Price pressures have continued to strengthen and broaden across the economy and inflation may rise further in the near term.
Very high energy prices are reducing the purchasing power of people’s incomes and, although supply bottlenecks are easing, they are still constraining economic activity. In addition, the adverse geopolitical situation, especially Russia’s unjustified aggression towards Ukraine, is weighing on the confidence of businesses and consumers.
1. Japan can defend its interest rate line by printing more money but at expense of the yen
2. Japan can defend the yen by hiking rates or by selling its reserves until reserves run out
Japan has a nasty choice
I received this email reply to the above Tweet from Michael Pettis.
“Looks right. I’d add that by weakening the yen, Japan seems always to support their exporters at the expense of their consumers, which may be why domestic demand is always so weak and growth so sluggish.“
The smart thing for Japan would be to hike rates and let the Yen strengthen.
Instead, if they stay on the same path, the yen might blow up.
All of Japan’s efforts to achieve growth by inflation and exports have backfired. One might think that after 40 years they would try something else.
The single worst choice for Japan would be to blow its currency reserves in an attempt to defend both the Yen and its interest rate peg.
“This is surely unworkable – a carve out for Hungary, which allows its refineries to enjoy sky rocketing margins on sales elsewhere in the EU because of their access to Russian crude. It’s almost laughable,” said Jeremy Warner.
It seems the carve out for Hungary was “workable” after all, with predictable results.
Russia, China, Hungary, and energy producers are the beneficiaries of these terribly counterproductive sanctions.
This is my “Hoot of the Day” but it’s early. I may easily need bonus hoots.
At the ECB, you better be gung-ho pro-EU. You better believe negative interest rates are a good idea. And you must back the idea that targeting 2% inflation makes sense.
Finally, if somehow you find yourself at the ECB disagreeing with any of those things, you are expected to shut your mouth so the consensus view never shows any dissent.
At FRBNY, I recall the people who ran Treasury markets, money markets, etc. literally had no relevant experience or expertise. The job of staff was to make them appear competent, but it didn’t really matter what they did because Fed can’t fail and they can’t get fired.
This creates a culture where anyone with talent or ambition GTFO ASAP. There are exceptions, but those who rise tend to be those who have no where else go. It’s a weird structure where the higher you go, the more incompetent you are.