The International Monetary Fund on Monday issued a very strong message on the progression of inflation, the major concern of major western economies over the past year, and urged central banks to prepare more ammunition. Not only did he warn that despite the threat of a recession, they must stick to their current strategy of making credit more expensive to slow the economy, he also called on them to be ready to tighten monetary policy further if necessary, “Even if that means a much stronger cooling of the labor market.”
“Inflation is taking too long to get back on track,” said the fund’s number two, Gita Gopinath, in her opening speech at the European Central Bank’s annual forum in Sintra, Portugal. The ECB, he said, like the rest of the banks, must remain “committed” to the mission of containing price increases, despite the risk of weighing on the economy. And governments need to be more careful about borrowing. “The fight will not be easy, financial tensions could worsen and growth could slow down even further,” he warned, without mentioning the problem: crisis, recession, unemployment.
The most rigorous discourse marked the climax of the Sintra meetings. Central bankers meet between this Monday and Wednesday at the same sumptuous hotel as they do every summer to discuss inflation trends, financial stability and the role of the cost of money and asset purchase programs in such a volatile environment as the current one. The inflation target of 2% set by these institutions is still within reach in the euro area (6.1% in June), the United States (4% in May) or the United Kingdom (8.7% in May), despite the current situation Distant significant improvement compared to last year (prices increased by double digits).
Gopinath began his speech by warning that he brought “three inconvenient truths” about monetary policy, and that sounded like someone warning that he was going to say something “politically incorrect” which automatically shields itself because who dares to contradict him and seem like a real guy.
The Fund’s truth #1: the difficulty of containing escalating inflation after a year of aggressive rate hikes and the need for more lumber, despite the threat of a crisis. Truth number 2: Financial stress can lead to a conflict between central banks’ two major goals, price stability and financial stability. Truth 3: Going forward, central banks will face a higher risk of rising inflation than before the pandemic due to structurally unresolved supply chain issues and climate challenges.
In eurozone countries, interest rates have risen by four percentage points in just one year, the fastest in their history, after almost a decade of virtually free money. And despite this abrupt change in conditions, the economy has resisted, to the surprise of bankers and non-bankers alike. But the IMF (and the ECB) also see the cross of inflation in the strength of the labor market and consumption, since in view of the losses in purchasing power suffered in the current panorama, an improvement in wages can be expected (and that companies will not sacrifice profit margins). The economists at the Eurobank have also raised their inflation forecasts and are currently arguing with the “stability of the labor market”.
A further cooling of the economy and thus also of the labor market is the recipe that the fund is prescribing. The question is how far. Until there is a recession? Even destroy jobs? This is the big truth – or not so true – uncomfortable, about which Gopinath, while not explicit, was eloquent: “The ECB and other central banks in a similar situation must be ready to respond vigorously to, or in the face of, new upward inflationary pressures “There are indications that inflation is more persistent, even if it means a much more pronounced slowdown in the labor market,” he said. “The cost of fighting inflation,” he added, “will be much higher if a prolonged period of high inflation raises expectations and changes dynamics.”
Gopinath pointed to another thorny aspect of the inflation debate, namely the role that corporate profits have played. According to an IMF report, these gains have been the main driver of inflation in Europe over the past two years, as companies raised prices in excess of increases in their energy costs. The ECB has also raised this issue. “If inflation falls quickly, companies should allow their profit margins to fall as well, absorbing some of the expected rise in wages,” he said, ruling out the possibility right away: “Businesses can resist this, especially if the economy and workers resist perform.” demand more wages”.
The fund’s number two acknowledged that prolonged monetary rigidity could lead to tensions and financial market fragmentation, something the eurozone has endured harshly during the euro crisis but has so far faced despite sharp rises in interest rates and the Economic situation has avoided uncertainty, thanks largely to the strength of national economies. He acknowledged that a stressed central bank could tolerate a slower return to inflation limits but warned that the threshold for allowing such easing would have to be very high.
He pointed to the ECB’s anti-fragmentation tool, a program to buy bonds from countries facing “unjustified and disorderly market dynamics”, but stressed that countries need to be “prudent” about their debt dynamics and banks need to strengthen their capital buffers. He also called for caution on the massive debt and other asset purchases (QE, “Quantitative Easing”), the liquidity hoses the Fed and ECB are using to counteract the financial debacle and the Great Recession.
Gopinath began his speech by quoting from Samuel Beckett’s Waiting for Godot, in which two tramps talk the whole play about Godot who never comes. Godot said it was low inflation. The difference is that Beckett’s character is an unknown type and Price Stability is an old friend, yes, one of the least punctual.
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