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Criticizing ECB is not really justified.

10.06. 2022

Yesterdays ecb announcement has been widely criticized by press and experts as too late and too little. I do see it differently, by 2 reasons:
1. Higher interest rates end inflations driven by increasing demand, breaking the overheating cycle of new investments creating new demand. Current inflation is induced by shortage, a supply shock, competition for scare goods. Prices do not rise because people heat and eat more. And will increasing interest rates see us heat and eat less for the sake of higher savings rates? Energy prices need a massive increase in supply volume to fall, means high investments into new technologies, locations, supply chains. Higher interest rates will slow this process, prices remain high.

2. Critics refer to a missing signaling effect and damaged ECB-credibility, too. But most current NBER research demonstrates: Words and actions of Central Banks reach and influence experts only; not the agents, firms and consumers. The concept of a broad belief in currency watchdogs steering inflation and economy is not matched by reality. Hence, increasing interest rates will impact individual investment and purchase decisions, but not the overall expectations of future developments.

 

Heike Adam

Heike Adam

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