It seems like a historical irony: on the very day that Italian Prime Minister Mario Draghi handed in his resignation, the European Central Bank (ECB) dared to end a decade without interest rate hikes that began in November 2011 under ECB President Draghi and culminated in a year-long phase of zero and negative interest rates.
There is no question that the central bank's current rate hike was long overdue. In view of an inflation rate of 8.6 percent in the euro area, it was no longer possible to explain to the citizens, with the best will in the world, why the guardians of price stability were not finally taking action. But one should not be under any illusions either:
Higher key interest rates will not change the rapidly rising prices for energy and food. Monetary policy has no influence on the supply that has been tightened by war and the pandemic. Their job is to prevent higher inflationary expectations from becoming permanently established in the economy, leading to a dangerous spiral in which wages and prices continue to escalate.
Not much will change in the precarious position of savers either. As long as the real interest rate, i.e. the interest after deducting inflation, remains negative for call money accounts and fixed-term deposits, they will continue to suffer considerable losses in prosperity year after year. However, a series of sharp interest rate hikes should not be expected if the ECB does not want to risk the heavily indebted countries of the euro area sliding into the next sovereign debt crisis.
Italy of all places is now the litmus test. Should the ECB make the mistake of using its new anti-fragmentation tool to intervene in this highly political crisis, it would seriously damage its credibility and make its job as an independent central bank even more difficult. When it started in 1998, the ECB promised citizens stable prices. There was never any talk of an unrestricted monetary policy. She should stick to this compass.
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