The European Central Bank faces a tough job deciding when to stop raising interest rates because it’s hard to gauge the impact of tightening, the chief economist of the Organization for Economic Cooperation and Development said.
(Bloomberg) — The European Central Bank faces a tough job deciding when to stop raising interest rates because it’s hard to gauge the impact of tightening, the chief economist of the Organization for Economic Cooperation and Development said.
Clare Lombardelli told Bloomberg Television that structural changes since the last cycle of rising borrowing costs, such as a higher proportion of fixed-rate loans, are making it difficult to assess effects feeding through to the real economy. That’s blurring the picture for central bankers.
“The transmission of monetary policy is very uncertain,” she said in an interview in the French city of Aix-en-Provence. “It’s quite difficult to judge the impact, and when the maximum point of that impact is going to be.”
Lombardelli said the challenge is particularly great at the current juncture in Europe because even as headline measure of inflation are coming down, there is still a lot of strength in core price pressures, which strip out volatile elements such as energy.
That’s a key point of contention for policymakers, who have signaled a rate hike for later this month, with no real hint of what will come after. Most indicators of underlying prices “have started to show some signs of softening,” ECB Vice President Luis de Guindos said last week.
His colleague, Mario Centeno of Portugal, said on Sunday that “it’s not coming down as fast as headline inflation, but we also need to remember that in the way up it played exactly the same trajectory.” The hawkish Bundesbank President, Joachim Nagel, insists however that underlying inflation remains a source of concern.
Core price growth accelerated in June to 5.4%, while headline gauge slowed noticeably to 5.5%.
“Europe’s facing a really difficult challenge on inflation,” said Lombardelli, who was chief economist at the UK Treasury until she took up her Paris-based role earlier this year. “It’s unpopular tightening monetary policy, but it is necessary to squeeze inflation out of the system because it’s really hurting, and it’s difficult for people to deal with.”
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