The global economy has been facing inflationary pressure due to the rise in the prices of goods and services. In response, central banks worldwide have been adopting different strategies to combat inflation. One of the common strategies adopted by central banks is to raise interest rates. In this article, we will discuss the battle of interest rates between the European Central Bank (ECB) and the Federal Reserve.
ECB’s Efforts to Combat Inflation
The governor of the National Bank of Belgium, Pierre Wunsch, has recommended that the ECB keep raising interest rates to combat inflation. In March 2023, the ECB lifted interest rates to 3.5%, which is the highest since the financial crisis in 2008. The aim of raising the benchmark is to limit the money supply and tackle inflation. However, raising interest rates also increases borrowing costs, which could discourage investors from dealing with certain assets, including cryptocurrencies.
Accelerating Reduction of Balance Sheet
Wunsch has also recommended that the ECB accelerate the reduction of its balance sheet to stimulate additional interest rate hikes. He suggests that a full stop of reinvestments this year could lead to additional interest rate hikes. Wunsch believes that the ECB should aim to reduce interest rates by another 75 basis points, although he expects the next hike to be a quarter or a half percent.
May’s Interest Rate Hike
Wunsch predicts that May’s interest rate hike could be about 25 or 50 basis points. He believes that if there is another upside surprise in core inflation and the ECB’s quarterly lending survey doesn’t look too bad, the ECB might have to increase interest rates by 50 basis points. If there is a positive surprise in core inflation, Wunsch believes that a 25-basis-point increase would be more appropriate.
Sticking to the Strategy
Wunsch supports the argument that central bankers have made, stating that a pivot should occur once the inflation rate drops to 2%. He believes that the ECB should stick to its strategy until it reaches that target. Recently, the ECB pushed interest rates up by 0.5% to 3.5%, even though inflation in the Eurozone has cooled off to 6.9% (as of March 2023).
Federal Reserve’s Interest Rate Strategy
The Federal Reserve has also been adopting a similar strategy in the United States. Interest rates currently stand at a range of 4.75% to 5%. The aim of the Federal Reserve’s interest rate strategy is also to combat inflation. However, the Federal Reserve has not raised interest rates as aggressively as the ECB.
Banque de France Governor’s Opinion
Francois Villeroy de Galhau, the Governor of the Banque de France, has a different opinion from Wunsch. Galhau believes that the ECB has already enforced most of its interest rate hikes. He believes that the strongest economic effect ahead of us will be the pass-through of what’s already in the pipeline. Galhau suggests that the central bank should enter into a more “open” phase, where interest rates remain untouched for a prolonged time instead of being lifted after each committee meeting.
The Battle of Interest Rates Continues
The battle of interest rates between the ECB and the Federal Reserve continues. The ECB seems to be more aggressive in raising interest rates to combat inflation, while the Federal Reserve has adopted a more cautious approach. It remains to be seen which strategy will be more effective in combating inflation in the long run. For now, it seems that the ECB will continue to raise interest rates, while the Federal Reserve may adopt a more patient approach.
In conclusion, the battle of interest rates between the European Central Bank and the Federal Reserve continues. While Pierre Wunsch, Governor of the National Bank of Belgium, believes that the ECB should continue to raise interest rates to combat inflation, Francois Villeroy de Galhau, Governor of the Banque de France, thinks that the policy is nearing its end. It remains to be seen which central bank’s strategy will prove to be more effective in the long run. As the global economy continues to evolve and face new challenges, central banks must remain vigilant and adapt their policies accordingly to ensure economic stability and growth.
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