Europe and Japan step up their fight against inflation

The fight against inflation is at the top of the agenda of priorities in European countries at the beginning of 2022 and starts to be discussed even in Japan, where the cost of living index is approaching the official target. This Friday (14), holders of central banks reinforced that they will fight the rise in prices with the instruments available.

ECB (European Central Bank) President Christine Lagarde said on Friday that eurozone inflation will cool to a record high this year, and the ECB is ready to take whatever steps are necessary to bring it back to normal. 2% target.

Consumer prices soared 5% last month, the highest rate ever recorded in the 19-nation currency bloc and more than double the target, as rising energy costs and supply constraints pushed up inflation for a number of goods and services. .

The ECB has long argued that price growth will slow on its own, but Lagarde said the ECB could adjust monetary policy if necessary.

“Our commitment to price stability remains unwavering,” she said in a speech. “We will take all necessary steps to ensure that we meet our 2% inflation target over the medium term.”

“We understand that rising prices are a concern for many people and we take that concern very seriously,” said Lagarde.

The ECB extended existing pre-pandemic stimulus measures last month, arguing that long-term price pressures are, in reality, too weak, and that the inflation rate is in danger of falling below target by the end of the year. .

Several officials dispute this narrative, however, arguing that risks are skewed towards higher inflation readings, so the ECB should start scaling back its extraordinary support measures.

“We have the flexibility to respond to a range of circumstances,” Lagarde said, adding that the drivers of inflation are actually a drag on growth.

“Higher energy prices are eroding household incomes and undermining confidence, while supply bottlenecks are leading to shortages in the manufacturing sector,” she said.

Bank of Japan discusses possible interest rate hike to curb inflation

Bank of Japan officials are debating how soon they can start signaling an eventual rate hike, which could come even before inflation hits the bank’s 2% target, sources said, encouraged by the widening price hike and a more “hawkish” Federal Reserve (predicting interest rate hikes to fight inflation).

While a real rate hike is hardly imminent and the central bank is on track to maintain an ultra-flexible policy for at least the rest of this year, financial markets may be underestimating its readiness to phase out its stimulus program.

Notably, the Japanese central bank’s carefully worded pledges to maintain expansionary monetary policy only apply to pumping money into markets steadily — not keeping interest rates at current low levels.

“The Bank of Japan has never committed to holding interest rates until inflation exceeds 2%,” said a source familiar with the bank’s thinking, a view shared by two other sources.

“That means, theoretically, the bank can raise interest rates before inflation gets above target.”

After nine years of aggressive monetary easing, the Bank of Japan appears to be finally getting its way. Inflation is approaching its elusive target and the public perception that deflation will persist is already changing.

The central bank is starting to drop hints that the days of zero interest rates may be numbered, signaling rising prospects of rising inflation.

The next step may be to adjust its guidance on the future path of rates, from the current pledge to keep rates at “current or even low levels”, the sources said.

This could happen even before inflation reaches 2% on a sustained basis.

“It’s clearly intentional,” a fourth source said of the interest rate guidance language. “Central banks need to allow themselves some flexibility in adjusting rates.”