> Isn’t this what the German constitutional court already said was illegal?
This seems to be exactly that.
The trick here is that it's not 'sovereign debt' as being held by one country , but rather it's a 'package of debt' with a normalize rate and more guarantee...
It's what Pro-EU have been advocating for decades , to avoid 'spread' within eu-zone...
Bailout for Italy. The discussion around this started last month (iirc) because Italy's yields started rising.
Whether the ECB should buy PIIGs debt was a big issue during the Eurocrisis. Iirc, the ECB had to create additional mechanisms, some of those were challenged by courts in member nations, and authority ended up resting outside the ECB (which some nations didn't like because it is basically unaccountable). I believe this scheme, although it will almost certainly be challenged again, attempts to move authority for these decisions within the ECB.
Nothing has been fixed (because it can't be fixed with the EU as it is).
Nope, I would expect it to do close to nothing to inflation.
The current inflation is primarily caused by high energy prices, secondary by shortages (semiconductors, grain, vegetable oils, etc) and third (delayed effect) higher wages due to worker shortages.
In theory, a rate hike reduces demand. But it won't for the above goods and services as they're barely optional. People are going to continue to heat their houses, vehicles will keep moving, factories won't be shut down at scale. People won't stop eating either.
I believe the much more aggressive rate hikes by the FED, multiple already, validate this point. It's not done nothing to reduce inflation.
I'm thinking it's going to be energy savings (by consumers and industry) and working on energy alternatives/abundance to really kill high inflation.
Another example of a non-working instrument: here in the Netherlands the long term mortgage rate (15-20 year fixed rate) has more than tripled in just 4 months time. It doesn't even move the needle in house prices. It has slightly slowed down growth, and that's it. The reason it doesn't work is because there's no supply and the demand is not that elastic. People need a place a live.
> I believe the much more aggressive rate hikes by the FED, multiple already, validate this point. It's not done nothing to reduce inflation.
It's way too early to make this claim. Fiscal policy such as setting interest rates has been studied and projected to take anywhere from 9 months to 24 months to see an effect on inflation metrics such as CPI. We won't know if what the Fed has done will have its desired effect until much later. We can only do what has been observed to have worked in the past and hope other secondary inflation drivers (i.e. supply shortages, commodities crisis) continue to die down.
inflation is dependent upon what money can buy, the amount of money, and the velocity of it. I agree generally with everything you said, with the addition that the euro supply had rather significant ~7% "leap" in early 2020 (in addition to the trend line of compound growth). I don't think the effect of this "money printing" effect can be discounted either.
At least in Europe it’s more company profits rather than wage raises that cause inflation. In Germany tax revenues went up 10% for wage taxes while going up 30% for company profits last year.
In Germany apartment prices went down in few cities with an overheated market. If prices stagnate long enough inflation effectively makes prices go down like in Germany from 2000 to 2010
I think the purpose of raising interest rates is mainly to bring inflation expectations down and stop the wage price spiral. If central banks fail to achieve that goal then inflation is going to last many more years.
Nobody expects interest rate hikes to have an immediate, direct effect on prices. The immediate effect it is supposed to have is not on energy prices but on wage negotiations.
I believe the plan is to increase the rate in steps over time as to not shock the marketplace and also be able to see how market conditions change between steps.
This seems like having your cake and eating it too. Because of our unprecedented bubble caused by low interest rates, what happened was our markets got even more sensitive to rate rises.
You can already see the impact of this in the real estate market. Its not pretty and i believe they will play hot potatoes until the next administration can take the blame. Don't know how it is in EU but probably similar dynamics.
Nobody wants to be that guy who takes the fall for the next recession. It's going to last a long time and lot of people seem like they are poised to buy the dip again like they have before.
Remember that markets falling to 40% isn't an outright meltdown but we've had it fall far past 50%, 80% was the biggest fall and that is the more likely scenario.
Well, it's a "medium term" goal. Medium term in economics generally refers to a timescale of 2-10 years. Pushing the inflation down to 2% this year would be unreasonable, but they may be able to push the inflation rate down below 2% in the upcoming years to at least partially compensate for the high inflation rate this year.
The argument is that the inflation in the Eurozone is driven much more by rising commodity prices than the demand-side inflationary pressures that the US/UK have been experiencing. It's generally accepted by central bankers that commodity prices can fluctuate and therefore there is less of a need to aggressively fight commodity-driven inflation.
So yeah, I think if by medium term you mean 1-2 years, it's certainly possible. Short-term there's basically nothing any single central bank can do about commodity inflation anyway. Lowering economic demand in the EU as a means to tackle high global commodity prices is a questionable strategy when the continent is on the brink of recession. They're screwed either way though.
The high inflation rate comes from several factors pushing together at the moment. On the one side, the policy of cheap money had to come to an end. On the other side, there is the war and the energy shortage as well as the global economy still suffering due to the pandemic. One could reasonably hope that the effects of the war, energy shortage and pandemic are coming to an end, reducing that pressure onto prices. If e.g. Russia continues to sell gas to Europe, energy prices shouldn't rise much further.
The article states that they increased rates by 0.5pp, not 0.5%, but probably not. Rule of thumb says that interest rates need to exceed the rate of inflation to see inflation come down.
"The Governing Council decided to raise the three key ECB interest rates by 50 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 0.50%, 0.75% and 0.00% respectively, with effect from 27 July 2022."
The Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) will continue for now though, the latter is planned until 2024.
(2) asset purchase programme cuts interest rate differences between countries.
Euroarea as it is now is very non-optimal currency region (by the Mundell's definition)
To fix it, Euroarea needs fiscal transfers. The US has automatic federal level stabilizers that smooth differences between states. Euroarea needs something similar in the long term. Common EU level unemployment would work well.
Italy doesn't have a "broken economy". It's a stereotype that just won't die no matter what, I guess. Their politics and everything connected to it are arguably a bit more haphazardly than what's common in countries further north. But they have a solid industrial base and have been economically stable for 30+ years.
The interesting thing about leaving the low interest regime is that this chance is BOTH only 0.5%ppts in absolute terms AND infinite in relative terms...
Transitive use of rises for an increase in price was a thing between 100 and 400 years ago, maybe your version is already simplified?
Gifted as both a past tense transitive verb and an adjective has been around for hundreds of years and never stopped. So, I’m not sure what you’re on about there.
That changes everything! That's what comments are for, the first purpose. If it's not intentional, great! I thought it was a native speaker trying to introduce an alteration of "raises", like with "gift", "gifted".
the interest rate on the main refinancing operations
and the interest rates on the marginal lending facility
and the deposit facility will be increased to 0.50%, 0.75% and 0.00%
Readit News
The TPI is another step forward towards the ECB getting real FED-like powers and centralizing debt. We live in historic times.
Of course they have to, otherwise Italy is bankrupt.
But I don’t see the euro lasting another 10-15 years.
Germany needs the EU more than Italy, in many ways. Particularly with herr Putin knocking at the door. They'll come around.
This seems to be exactly that.
The trick here is that it's not 'sovereign debt' as being held by one country , but rather it's a 'package of debt' with a normalize rate and more guarantee...
It's what Pro-EU have been advocating for decades , to avoid 'spread' within eu-zone...
For simplification let's say they spend 10% of their anual budget servicing debt at an average of 5% interest rate
If the base interest rate rises by 50 bps, you could argue the average debt held by PIGS would eventually rise by the same amount, _at least_!
So now you have 5.5% interest rates, which is a 10% increase
So the anual budget used to service the debt would also increase by 10%, from 10% to 11%
By buying bonds from these countries you pressure the yields down
Whether the ECB should buy PIIGs debt was a big issue during the Eurocrisis. Iirc, the ECB had to create additional mechanisms, some of those were challenged by courts in member nations, and authority ended up resting outside the ECB (which some nations didn't like because it is basically unaccountable). I believe this scheme, although it will almost certainly be challenged again, attempts to move authority for these decisions within the ECB.
Nothing has been fixed (because it can't be fixed with the EU as it is).
https://youtu.be/xbiDrzTd8fE
Is raising rates by 0.5% anywhere near enough to get inflation to 2%, given that inflation is currently at 8.6%?
https://ec.europa.eu/eurostat/statistics-explained/index.php...
The current inflation is primarily caused by high energy prices, secondary by shortages (semiconductors, grain, vegetable oils, etc) and third (delayed effect) higher wages due to worker shortages.
In theory, a rate hike reduces demand. But it won't for the above goods and services as they're barely optional. People are going to continue to heat their houses, vehicles will keep moving, factories won't be shut down at scale. People won't stop eating either.
I believe the much more aggressive rate hikes by the FED, multiple already, validate this point. It's not done nothing to reduce inflation.
I'm thinking it's going to be energy savings (by consumers and industry) and working on energy alternatives/abundance to really kill high inflation.
Another example of a non-working instrument: here in the Netherlands the long term mortgage rate (15-20 year fixed rate) has more than tripled in just 4 months time. It doesn't even move the needle in house prices. It has slightly slowed down growth, and that's it. The reason it doesn't work is because there's no supply and the demand is not that elastic. People need a place a live.
It's way too early to make this claim. Fiscal policy such as setting interest rates has been studied and projected to take anywhere from 9 months to 24 months to see an effect on inflation metrics such as CPI. We won't know if what the Fed has done will have its desired effect until much later. We can only do what has been observed to have worked in the past and hope other secondary inflation drivers (i.e. supply shortages, commodities crisis) continue to die down.
[1] https://www.lancaster.ac.uk/staff/ecajt/inflation%20lags%20m...
https://www.statista.com/statistics/921364/value-of-m2-money...
In Germany apartment prices went down in few cities with an overheated market. If prices stagnate long enough inflation effectively makes prices go down like in Germany from 2000 to 2010
Nobody expects interest rate hikes to have an immediate, direct effect on prices. The immediate effect it is supposed to have is not on energy prices but on wage negotiations.
You can already see the impact of this in the real estate market. Its not pretty and i believe they will play hot potatoes until the next administration can take the blame. Don't know how it is in EU but probably similar dynamics.
Nobody wants to be that guy who takes the fall for the next recession. It's going to last a long time and lot of people seem like they are poised to buy the dip again like they have before.
Remember that markets falling to 40% isn't an outright meltdown but we've had it fall far past 50%, 80% was the biggest fall and that is the more likely scenario.
So yeah, I think if by medium term you mean 1-2 years, it's certainly possible. Short-term there's basically nothing any single central bank can do about commodity inflation anyway. Lowering economic demand in the EU as a means to tackle high global commodity prices is a questionable strategy when the continent is on the brink of recession. They're screwed either way though.
Deleted Comment
The Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) will continue for now though, the latter is planned until 2024.
https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.mp2202...
(1) interest rate hike cuts interests.
(2) asset purchase programme cuts interest rate differences between countries.
Euroarea as it is now is very non-optimal currency region (by the Mundell's definition)
To fix it, Euroarea needs fiscal transfers. The US has automatic federal level stabilizers that smooth differences between states. Euroarea needs something similar in the long term. Common EU level unemployment would work well.
- Countries with broken economy like Italy win
- Countries that kept their economy more viable lose
- Zombie companies will keep going?
- Mortage owners lose (some European countries have floating rate mortages)
https://twitter.com/heimbergecon/status/1539486969977360384
s/some/most/
The interesting thing about leaving the low interest regime is that this chance is BOTH only 0.5%ppts in absolute terms AND infinite in relative terms...
Nobody simplifies my Mandarin.
Gifted as both a past tense transitive verb and an adjective has been around for hundreds of years and never stopped. So, I’m not sure what you’re on about there.