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?
Chartbook 189 The ECB's inflation dilemma.
Chartbook 189 The ECB's inflation dilemma.
Chartbook 189 The ECB's inflation dilemma.
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?