Jim, Chris, the ECB this week said that "inflation will remain high for longer than expected". In other words it more or less accepted that it was wrong about so-called 'transitory' inflation (and it still would have been wrong even if Putin hadn't invaded Ukraine). My view is that it is past time that the ECB shifted out of its negative interest rate policy which has served no useful purpose. Do you really that that holding a -0.5% Depo rate serves a better purpose than that which a 0.0% Depo rate can deliver? I can't understand any justification for maintaining a -0.5% Depo rate and I suggest that there will be no adverse economic consequence to moving this upwards to 0.0% over the course of the next 12 months. Am I wrong?
Thanks Mark - I think the answer is ‘it all depends’. The Bank of Japan must be looking on in amazement at the inflation being generated in the West by policies that the Japanese have been trying for years - failing to generate any inflation, until very recently anyway. Movements of 0.5% either way usually don’t have much effect. It’s the signalling that does with any given change that is important. Behaviour can change a lot if agents believe there is series of hikes/cuts coming. More generally, there is still a lot that we don’t understand about the links between monetary policy and the inflation process. The ways in which fiscal and monetary policy interact are very poorly understood.
I think that signalling of central bankers has been quite erratic of late. Being kind to them, that’s probably just a function of the high volatility in the market. We’re all struggling to make sense of all that’s going on and central bankers are probably no different. But I wonder how much of that signalling power is now diminished as there’s a good chance whatever they come out with now will change in a few weeks time.
I think you’re right that the linkage between monetary policy and inflation is very poorly understood. But to be kind again to central bankers, I think the former members of Team Transitory have demonstrated to have some ability to drill into the sources of inflation, and realise how much inflation is from prices controlled outside of the domestic economy and have little to do with domestic demand. And for this they are willing to let inflation run a bit, rather than trying to cause deflationary pressures elsewhere to compensate just to hit their target metric. In my view that’s sensible.
Having said all that, I think central bankers have a proven inability to consider inflationary effects beyond their target metric, and all the societal and political upheaval that comes with it. Namely; house price inflation. And that is probably due to their narrow scope defined by law. And I’m sure Christine Legarde is happy to keep it that way.
Jim, Chris, the ECB this week said that "inflation will remain high for longer than expected". In other words it more or less accepted that it was wrong about so-called 'transitory' inflation (and it still would have been wrong even if Putin hadn't invaded Ukraine). My view is that it is past time that the ECB shifted out of its negative interest rate policy which has served no useful purpose. Do you really that that holding a -0.5% Depo rate serves a better purpose than that which a 0.0% Depo rate can deliver? I can't understand any justification for maintaining a -0.5% Depo rate and I suggest that there will be no adverse economic consequence to moving this upwards to 0.0% over the course of the next 12 months. Am I wrong?
Thanks Mark - I think the answer is ‘it all depends’. The Bank of Japan must be looking on in amazement at the inflation being generated in the West by policies that the Japanese have been trying for years - failing to generate any inflation, until very recently anyway. Movements of 0.5% either way usually don’t have much effect. It’s the signalling that does with any given change that is important. Behaviour can change a lot if agents believe there is series of hikes/cuts coming. More generally, there is still a lot that we don’t understand about the links between monetary policy and the inflation process. The ways in which fiscal and monetary policy interact are very poorly understood.
My tuppence worth (for what it’s worth):
I think that signalling of central bankers has been quite erratic of late. Being kind to them, that’s probably just a function of the high volatility in the market. We’re all struggling to make sense of all that’s going on and central bankers are probably no different. But I wonder how much of that signalling power is now diminished as there’s a good chance whatever they come out with now will change in a few weeks time.
I think you’re right that the linkage between monetary policy and inflation is very poorly understood. But to be kind again to central bankers, I think the former members of Team Transitory have demonstrated to have some ability to drill into the sources of inflation, and realise how much inflation is from prices controlled outside of the domestic economy and have little to do with domestic demand. And for this they are willing to let inflation run a bit, rather than trying to cause deflationary pressures elsewhere to compensate just to hit their target metric. In my view that’s sensible.
Having said all that, I think central bankers have a proven inability to consider inflationary effects beyond their target metric, and all the societal and political upheaval that comes with it. Namely; house price inflation. And that is probably due to their narrow scope defined by law. And I’m sure Christine Legarde is happy to keep it that way.