From the United States to Europe, the United Kingdom and other regions, central banks are maneuvering with their interest rates to combat inflation. Everyone makes their own announcements, but is the communication effective? Jean-Paul Betbeze explains why the situation has changed in this area.
Monetary policy is magical: it manipulates a very short-term interest rate, comments on it for an hour and thinks that the expected results will appear, not only over several days, but over several years! Thus, on September 14, Christine Lagarde, president of the ECB, raised her rates by 25 basis points to 4.5% and announced that she would maintain them for several months, predicting that the price increase would reach 1.9%. end of 2025. A few hours later, Jerome Powell, at the Fed, announces that he is maintaining his rates at 5.5%, but is preparing to act if inflation does not rise to 2%, while it is stubbornly at 3.7%. On September 20, the Bank of England maintained its rates at 5.25%, with 5 votes against 4 who would like an increase to 5.5%, inflation being at 6.7%.
Moral: in the euro zone, rates would be close to their maximum, in the hope that inflation will decline. In the United States, they could rise, while inflation is overall modest, but stubborn. In the United Kingdom, they are expected to increase. Each time, for slightly different reasons, the same logic is in place: we must act on people’s minds to ensure that inflation falls towards “2% in the medium term”.
Central banks have seen the limits of their power
All monetary policies have the same objective, the same tools and the same concern: to convince. In the hours following the Central Bank’s decision, the markets will react through the stock market and long-term rates. A few more weeks and we will have the feeling of businesses and banks, then consumers. Credibility is what you need to achieve. It is measured by the gap between the forecasts of the markets and economic agents on medium-term inflation compared to 2%: the famous price anchor. Above 2%, worse if the gap widens, there is danger ahead. The Central Bank must raise its rates and repeat that it will do so until the anchor has returned to the desired 2%. Credibility comes from persistence and repetition, with success to be had of course.
From this point of view, central banks have seen the limits of their power: the time is no longer for “forward guidance”, where it was enough to tell the markets what the central bank would do, putting them in the position. confidence. It was the time of emerging from the “great stagnation” where inflation was not threatening (thanks to China) and where rates had to be raised slowly and constantly. The time is no longer Covid, this crisis which synchronizes economies with the threats of deflation. To get out of it, it was necessary to open the credit floodgates, which awakened inflation. But this is a new inflation which no longer comes from real estate as in 2007 with subprimes and obviously not from industry. It is fueled initially by the margins that entrepreneurs wanted to rebuild and today by food, wage increases in services and oil. It is linked to war, oil and wages in our 80% service economies. We must therefore repeat internally that rising wages and prices are the enemy by providing room for maneuver if the price of a barrel continues to increase.
Monetary policy must create a halo of uncertainties. She will say each time that she depends on current data for her decisions: she is “state dependent”. But, at the same time, without worrying too much about contradicting itself, it will try to outline futures, an old memory of “forward guidance”. Monetary policies are thus navigating in a more geopolitical environment than ever with the desire to chart the future, while giving themselves degrees of freedom to navigate as closely as possible.
Only in extreme cases can one say “whatever it takes”. But the crisis must be major and the central banker must be fantastically credible: we are not there.
This article is originally published on boursorama.com