As 2023 begins, policy-makers around the world are still trying to figure out how to respond to the lurching acceleration of inflation that began in the second half of 2021 and that now seems to have crested. In 2022 it was all hands on deck. In Europe, where the energy price shock was most intense, a wide range of policies were debated and deployed including price controls and large fiscal subsidies. Now, as the sectoral price shock begins to ebb, the focus is less on price controls or large fiscal transfers and once again on the central banks. The balance the central bankers have to strike is delicate and their main instruments - interest rates and quantitative tightening - are blunt. How quickly will they move from QE and QT? Will they continue to raise rates in large or small increments? Where will they stop? What is the terminal rate? And when they might contemplate bringing rates back down again?
The emphasis by KNOTT et al on raising rates is because Lagarde is so fearful of fragmentation of sovereign debt spreads if QT begins in earnest.The German debt is the HQLA putting a bid to Bunds as it is used for collateral purposes.Until the EU has genuine fiscal harmonization the fear rests on Lagarde to take the least disruptive route----raing rates but even Knott noted in the FT three weeks ago that over a 1/3 of the voters desired 75 basis point increase
Gotta contain domestic demand to contain war inflation.
The hawk/dove analysis chart seems to be a Protestant/Catholic chart, except for Austria.
Comparisons to the FED are expected, and sensible, especially regarding policy and maybe general communication strategy. But just dropping a line "do it like the FED" seems somewhat rush. EU institutions are still "young" enough, and out of my head I can think of two more, the Commission and especially the European Court of Justice, that do not allow for the publication of dissenting opinions.
The calls for salient deliberations are noble, but it will take a huge leap of supranational faith.
I am only an observer but it seems the answer is always more spending - lower interest rates -