According to European Central Bank officials who warned that price growth could spiral out of control if strong action is not taken, a greater “sacrifice” will be needed to contain inflation than in previous periods of monetary policy tightening. .
Isabel Schnabel, a member of the ECB’s Governing Council, and François Villeroy de Galhau, governor of the Banque de France, said on Saturday that European monetary policy must remain tight for an extended period of time.
Their comments at the Jackson Hole meeting of central bankers from around the world in Wyoming, US, echoed those of Fed Chair Jay Powell, who said Friday. vowed to “keep it up” negate inflation.
The pace of price growth is at a level not seen in decades in many advanced economies.
“Central banks are likely to face a higher sacrifice ratio compared to the 1980s, even if prices react more strongly to changes in domestic economic conditions, as the globalization of inflation makes it more difficult for central banks to cope with price pressures. control,” said Schnabel. said.
The sacrifice ratio measures how much pain central banks will have to inflict in terms of weaker growth and less job creation to get inflation back under control.
Villeroy said there should be “no doubt” about the bank’s willingness to raise interest rates above the so-called neutral rate, a level that does not promote or limit growth. He estimated this percentage to be between 1 and 2 percent. Villeroy said it could reach this level “before the end of the year”, adding: “Our will and ability to carry out our mandate are unconditional.”
Euro-zone inflation is expected to hit a new all-time high of 9 percent in the year to August, when the latest data will be released on Wednesday.
Schnabel called for “strong determination to get inflation back on target quickly”. She added that if a central bank “underestimates the persistence of inflation – as most of us have done for the past year and a half – and is slow to adjust its policies as a result, the costs could be significant”.
The ECB ended eight years of negative interest rates last month by raising the deposit rate by half a percentage point to zero, surpassing previous advice. Some members of the 25-member board of directors are calling for a 0.75 percentage point rate hike to be continued at its meeting on September 8.
Schnabel, a former German economics professor who joined the ECB’s Governing Council in early 2020, is one of the central bank’s most influential voices on policy as head of market operations. She warned that “unprecedented pipeline pressures, tight labor markets and remaining constraints on aggregate supply threaten to fuel an inflationary process that becomes harder to control the more hesitant to act on it”.
Inflation expectations are rising among the public and among professional forecasters, many of whom expect prices to continue rising above the ECB’s 2% target in the coming years, Schnabel said, adding that the institution’s credibility is at stake. was standing.
“Both the probability and the cost of the current high inflation becoming entrenched in expectations are uncomfortably high,” Schnabel said. “In this environment, central banks must act vigorously.”
Villeroy – usually a centrist on the ECB’s Governing Council – repeated the aggressive tone. But the French central bank governor said he still thought a 0.5 percentage point rate hike next month would be enough, saying he preferred “another important move in September”.
The comments come a day after Powell reset expectations on how high interest rates in the US may need to rise and for how long, as the Fed grapples with excessive price pressures caused in part by supply-related factors, but also by excessive demand.
The Fed’s chairman warned that efforts to cool the economy would likely require a “sustained period” of low growth, a weaker labor market and “some pain” for households and businesses.
Like his counterparts at the ECB, Powell said a failure to successfully tame inflation now would lead to higher costs later, suggesting the Fed is unlikely to interrupt its tightening cycle any time soon.
In contrast, Haruhiko Kuroda, governor of the Bank of Japan, explained from the audience during the Q&A section of the Jackson Hole panel why his country did not tighten monetary policy aggressively.
“We have no choice but to continue monetary easing until wages and prices rise in a stable and sustainable manner,” he said. Kuroda predicted that Japanese inflation would approach 3 percent by the end of this year and slow to 1.5 percent next year.