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Automatically translated from Basque, translation may contain errors. More information here. Elhuyarren itzultzaile automatikoaren logoa
Europako Banku Zentrala

Why increased interest rates will not serve to curb inflation

  • The European Central Bank will increase interest rates by 0.25% in July and will stop buying the debt for the first time in eleven years. Banking authorities have argued that this is a measure to deal with price increases, but will it?
Urko Apaolaza Avila
09 June 2022 - 16:18
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“In line with its monetary policy, the Governing Council plans to increase the ECB’s official interest rates at the July Assembly of 25 basis points.” This has been announced by the European Central Bank, which will increase interest rates and end with a journey of eleven years, ceasing to offer negative interests and abandoning the policy of mass debt buying. The reason? Inflation.

They note that “the forecast indicates that inflation will remain above expectations for a period of time” and that the “normalization” of this monetary policy is one of the variables for lowering prices.

In particular, the ECB will increase interest rates by 0.25% in July and a further increase will be made in September. According to this institution, the annual inflation of the European Union will be 6.8% in 2022 and is expected to decrease to 3.5% in 2023 and to 2.1% in 2024.

Christine Lagarde, President of the ECB, has placed the measure in the current European context and stated that “Russia’s unjustified attack on Ukraine” is even more uncertain in the European economy. Therefore, as from 1 July, the European bank will cease to buy the debt and end the expansive monetary policy initiated at the time of Mario Draghi.

Why it won't work

Such a measure was expected and has been studied by experts in recent weeks. In addition, the US Federal Reserve has also increased its interest by 0.5%, reaching the biggest increase in the last 22 years. But will that serve to cope with the increased price growth of the three decades?

The economist Mikel Zurbano has explained to us in ARGIA that this is a conclusion drawn from the “traditional liberal vision”, but “expanding interest rates or limiting wage increases, beyond being socially unfair, are not effective measures to limit price growth”.

In fact, according to the economist, this increase is due to supply, either to the explosion in oil prices, to the rise in the prices of other energy commodities, or to problems in value chains after the pandemic. But also because large companies and oligopolies have benefited excessively, they are “stimulating prices”.

According to Isidro Esnaola’s analysis in the Gara newspaper, interest rates are not only unable to curb the rise in prices, they “increase” this increase, setting Turkey as an example: “High rates have failed to reduce the increase in life.” Therefore, the analyst has come to a conclusion: “There is a decision made to lower inflation in value or not. It is important to give the way in which the situation is controlled.”

Europako Banku Zentrala Ekonomia Inflazioa
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