A bigger “sacrifice” will be needed to tame inflation than in previous monetary policy tightening, according to European Central Bank officials who warned that inflation risks spiraling out of control unless strong action is taken.
Isabel Schnabel, an ECB executive board member, and François Villeroy de Galhau, governor of the Banque de France, said on Saturday that European monetary policy must remain tight for an extended period.
Their remarks at the Jackson Hole gathering of central bankers from around the world in Wyoming, US, echoed the remarks of Federal Reserve Chairman Jay Powell, who on Friday vowed to “get on with it”[ads1]; to stop inflation.
The pace of price growth is at a level not seen for decades in many advanced economies.
“Central banks are likely to face a higher sacrifice ratio compared to the 1980s, even if prices were to respond more strongly to changes in domestic economic conditions, as the globalization of inflation makes it more difficult for central banks to control price pressures,” Schnabel said.
The sacrifice rate measures how much pain central banks will have to inflict in the form of weaker growth and lower job creation in order to regain control of inflation.
Villeroy said there should be “no doubt” about the bank’s willingness to raise interest rates above the so-called neutral rate, a level that neither helps nor constrains growth. He estimated this proportion to be between 1 and 2 per cent. Villeroy said it could reach this level “before the end of the year”, adding: “Our willingness and our capacity to deliver on our mandate is unconditional.”
Eurozone inflation is expected to set a new record of 9 percent in the year to August when the latest figures are published on Wednesday.
Schnabel called for “strong determination to bring inflation back to target quickly”. She added that if a central bank “underestimates persistent inflation – as most of us have done over the past year and a half – and if it is slow to adjust policy as a result, the costs could be significant”.
The ECB ended eight years of negative interest rates last month by raising the deposit rate by half a percentage point to zero, beating previous guidance. Some members of its 25-person governing council are asking it to consider going ahead with a 0.75 percentage point rate hike at its Sept. 8 meeting.
Schnabel, a former German economics professor who joined the ECB’s board in early 2020, is one of the central bank’s most influential voices on policy leading market operations. She warned that “unprecedented pipeline pressures, tight labor markets and the remaining restrictions on aggregate supply threaten to feed an inflationary process that becomes harder to control the more hesitantly we act on it”.
Inflation expectations are rising among the public and professional forecasters, many of whom expect prices to continue rising by more than the ECB’s 2 percent target for several years, Schnabel said, adding that the institution’s credibility was at stake.
“Both the likelihood and cost of current high inflation being anchored in expectations is uncomfortably high,” Schnabel said. “In this environment, central banks must act forcefully.”
Villeroy – usually a centrist on the ECB’s governing council – echoed the hawkish tone. But the French central bank governor signaled he still believed a 0.5 percentage point rate hike would be enough next month, saying he favored “another significant step in September.”
The comments come a day after Powell reset expectations about how high US interest rates may need to rise and for how long, as the Fed grapples with excessive price pressures driven in part by supply-side factors but also excessive demand.
The US central bank chief warned that efforts to cool the economy are likely to require a “sustained period” of low growth, a weaker labor market and “some pain” for households and businesses.
Like his colleagues at the ECB, Powell said a failure to successfully tame inflation now would lead to higher costs later, suggesting the Fed is unlikely to stop its tightening cycle anytime soon.
In contrast, from the floor during the question-and-answer portion of the Jackson Hole panel, Bank of Japan Governor Haruhiko Kuroda explained why his country did not tighten monetary policy aggressively.
“We have no choice but to continue monetary easing until wages and prices rise in a stable and sustainable way,” he said. Kuroda estimates that Japanese inflation will approach 3 percent by the end of this year and then slow to 1.5 percent next year.