Coinspeaker
EU Central Banks Facing Triple Dilemma amid Growing Inflation
In recent times, Central Banks in the European Union (EU) are facing a triple dilemma that demands delicate balancing acts and strategic decisions following persistent high inflation that is threatening to cripple the economy.
The Triple Dilemma
Carsten Brzeski, the Global Head of Macro at Dutch bank ING, succinctly sums up the challenge facing European Central Banks in a recent report stating:
“All Central Banks are coping with the same triple dilemma: how to balance between slowing economies, still too high inflation, and the delayed impact of unprecedented rate hikes.”
Another common trend among European Central Banks is their proximity to peak interest rates. This proximity complicates the aforementioned dilemmas. When interest rates are already close to their peak, Central Banks have less room to maneuver in response to changing economic conditions.
This limited flexibility means that Central Banks must exercise even greater caution in their monetary policy decisions. Adding to the complexity of the situation is the recent surge in oil prices. Rising oil prices can have a dual impact on the economy.
On one hand, they can fuel inflationary pressures by increasing the cost of energy, which ripples through various sectors of the economy. On the other hand, higher oil prices can act as a drag on economic growth by increasing production costs and reducing consumer spending power.
This issue puts Central Banks in a difficult position. They must carefully evaluate the possible inflationary effects of increased oil costs, as well as the negative effects on economic growth. Deciding whether to tighten or loosen monetary policy in reaction to swings in oil prices necessitates a complex balancing act.
Beyond EU, Central Banks Navigating Uncertainty
Central Banks around the world are grappling with the difficult task of managing excessive inflation while maintaining economic development. For instance, the Bank of England recently opted to pause interest rate hikes after 14 consecutive increases, keeping its main policy rate steady at 5.25%.
The decision was a close call, with five Monetary Policy Committee members voting to hold and four favoring another 25 basis point hike. The lower-than-expected August inflation figure, at 6.7% year-on-year, possibly influenced this decision. Although still above the BOE’s 2% target, it was below the forecast of 7%.
In Switzerland, the SNB opted for a pause for the first time since March 2022, citing the significant tightening of monetary policy over recent quarters as countering remaining inflationary pressure. Swiss inflation stood at 1.6% in August, within the national target range of 0-2%.
SNB Governor Thomas Jordan emphasized that “the war against inflation is not yet over,” hinting at potential further tightening in December. The SNB forecasts annual Swiss inflation to average 2.2% in 2023 and 2024, and 1.9% in 2025, assuming the policy rate remains at 1.75%.
On September 14, the European Central Bank boosted interest rates by 25 basis points, implying that they had hit a peak. The ECB noted that maintaining these interest rate levels would greatly contribute to the timely restoration of inflation to target levels. The bank did, however, emphasize that rates would remain at suitably restrictive levels for as long as necessary.
EU Central Banks Facing Triple Dilemma amid Growing Inflation
