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European Central Bank chief Christine Lagarde said Monday that interest rates need to continue rising at a “steady pace” in order to avoid inflation becoming entrenched. online news
While energy prices have recently come down, Lagarde said underlying inflation continues to rise.
“It is vital that inflation rates above the ECB’s two-percent target do not become entrenched in the economy,” she said at an event hosted by the operator of the Frankfurt stock exchange.
In less than six months the ECB has raised its key policy rates by 2.5 percentage points, the fastest increase in its history.
“ECB interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive, and stay at those levels for as long as necessary” to bring inflation down, Lagarde added.
“We must bring inflation down. And we will deliver on this goal,” she vowed.
ECB policymakers are expected to raise rates at their meetings in February and March.
“We will stay the course to ensure the timely return of inflation to our target,” said Lagarde.
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Notes from APS Radio News
From the early part of March 2020 to April 15, 2022, the US Federal Reserve had been increasing its holdings by nearly $5 trillion dollars.
It did this each month of that period by buying billions of dollars of corporation and government bonds, in effect, infusing massive amounts of money into the economy.
And, as the FRED graph shows, it did so at rapid rate or at a high rate of velocity.
Economists say that when massive amoutns of fiat money are infused into the economy at high rates of velocity, the likelihood of noticeably higher rates of inflation is made greater.
A number of other central banks followed a similar policy.
For example, between late February 2020, even days before the media started fixating on the virus thingy, and March of last year, the European Central Bank embarked on its own version of monetary expansion.
During that period, the ECB increased its holdings by over 5 trillion euros.
The Bank of Japan also increased its holdings.
Between February of 2020 and the early part of 2022, it had increased its holding by a few hundred trillion Yen.
For a number of years, including the Bank of Japan, major central banks have kept their interest rates low.
For its part, the Bank of Japan kept its interest rates at negative rates, meaning that depositors had to pay banks to hold their money.
During and before the pandemic, major corporations had increased the number of mergers and acquisitions, as those entities were able to make their purchases using inexpensive money and higher stock valuations.
The other part of the equation was that of supply.
As a result of lockdowns, many small and medium-sized businesses were closed.
Shipping ports had lost workers, and truck drivers going to those ports had to wait in long lines, as a result.
In effect, well before Russia’s invasion of Ukraine, shortages of various goods and services developed.
The invasion and sanctions imposed have aggravated shortages of commodities like petroleum and grain.
And there have been instances of price gouging.