“The ECB prefers recession to inflation! » Editorial by Charles SANNAT – Insolentiae

“The ECB prefers recession to inflation!  » Editorial by Charles SANNAT - Insolentiae

My dear impertinent, dear impertinent,

After a month of absence, I am very happy to have you back to comment on the exciting and rich news. Also happy to try to share with you analyses, reflections, anticipations to enlighten you on your choices, your strategies and help you improve your personal resilience.

Obviously I have a lot to tell you and to tell you about this beginning of the school year, let’s say more precisely in this pre-start!!

I suggest we talk quickly about inflation. We will have plenty of time to detail all of this in the coming days.

“For the ECB, inflation must be fought, even at the risk of weaker growth and higher unemployment”!

The conclusion is simple.

The ECB prefers recession to inflation.

Finally in theory.

Let’s continue with this Capital article here.

“Faced with the ‘path of caution,’ we must defend ‘the path of determination,’ which consists of ‘reacting more forcefully to the current inflationary rebound, even at the risk of lower growth and higher unemployment,” he advocated on Saturday, March 27. August. Isabel Schnabel, member of the executive board of the European Central Bank (ECB) during the meeting in Jackson Hole, in the United States. Three factors argue in favor of this option, he explained during the great annual mass of central bankers in the American West: “uncertainty about the persistence of inflation, threats to the credibility of the central bank and the potential costs of acting too late” against increase of prices, according to his speech published online by the ECB. Banque de France Governor François Villeroy de Galhau also defended the ECB’s decisive action.

“We can take a gradual approach, but we must not be slow and delay normalization (of monetary policy, editor’s note) until expectations of higher inflation force us to hike rates aggressively,” he said. “Lowering inflation to 2% is our responsibility; our willingness and ability to meet the commitments of our mandate is non-negotiable,” the governor said, according to his speech obtained by AFP. On Friday, US Federal Reserve Chairman Jay Powell warned that a return to price stability “will take time” and “will lead to a long period of weaker growth.” The rise in consumer prices in the euro zone reached a record level of 8.9% per year in July”.

The Fed is raising its rates pretty quickly and the ECB should finally do the same faster than it would have liked. Also, rumors now abound of a 0.75% rate hike from the ECB at its next meeting.

We will see.

So will this be enough to break inflation?

Probably not!

Why ?

Because if prices rise, it is not so much because there is a lot of demand, but because there is a lack of supply.

When there is no more sunflower oil, prices skyrocket, the same happens with gasoline.

Raising interest rates will not change the fact that we refuse to buy Putin’s gas and that we still need to heat up and keep our factories running…

So that won’t change anything about the rate of inflation, whatever the mammouchis at the ECB say, they only saw temporary inflation when I said it would be long lasting.

“If a central bank underestimates the persistence of inflation, as most of us have for the past year and a half, and is slow to adjust its policies accordingly, the costs can be considerable,” said Ms Schnabel. For François Villeroy de Galhau, the neutral reference interest rate, compatible with long-term balanced growth, “is probably between 1% and 2%”.

While acknowledging that “at least for Europe, growth prospects for next year have been revised downwards due to energy and gas prices, as well as exchange rate developments”, the governor of Banque de France does not rule out a rate hike above the neutral level. “Have no doubt that at the ECB we will raise rates if necessary beyond normalization,” says Mr. Villeroy de Galhau in his speech “.

If the ECB raises rates too high for too long, it will quickly trigger an insolvency movement, in particular of states and, in general, of all economic agents that are highly indebted, if not too indebted.

It is already too late, but all is not lost.

Get ready!

Carlos Sannat

“Insolentiae” means “impertinence” in Latin.
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