The closer we get to May 4th and the European Central Bank’s next interest rates decision, the more influential figures are weighing on what the ECB should do.
On Friday, it was the International Monetary Fund (IMF) speaking out. Alfred Kammer, who runs the fund’s European department, not only warned the ECB to keep hiking interest rates but also said EU nations should tighten fiscal policy —government spending and taxation — in an effort to tame inflation.
“For the ECB that means further tightening, tightening for longer — we estimate until mid-2024 — in order to bring inflation down to target sometime in 2025,” Kammer said. “Inflation cannot be just dealt with by the central bank, you need fiscal policy to support it,” he added, noting cost of living supports in various EU states should be phased out.
Kammers’ comments are sound economic policy — he also noted that inflation is primarily a tax on the poor — and when a government cuts spending, that can give a central bank the space to slow interest rate hikes.
The great Guinness shortage has lessons for Diageo
Ireland has won the corporation tax game for now, but will that last?
Corkman leading €11bn development of Battersea Power Station in London: ‘We’ve created a place to live, work and play’
Elf doors, carriage rides and boat cruises: Christmas in Ireland’s five-star hotels
Why do some shareholders in the Republic's largest private residential landlord feel shortchanged?
But, as we have seen since time immemorial, dealing with inflation is never just a question of economics. Political calculations come into the equation, too. Governments the world over can recognise the economic options they have, and still seek a way of managing the problem while minimising the amount of pain inflicted on the population. Democratic regimes don’t remain in office for long without broad popular support. Higher unemployment as a result of economic tightening is a surefire way to lose that support.
The IMF’s intervention is useful to ECB president Christine Lagarde, as it publicly clarifies the choice that she and her governing council face next week and in the months ahead: press on in a bid to crush inflation, whatever the cost, or slow down in the hope of at least bringing the European public with her decisions. Lagarde and Phillip Lane, the ECB’s chief economist and former governor of the Central Bank of Ireland, will earn their crust in the weeks ahead.
