Anti-inflation therapy from central bankers in Sintra

A year later, everything has changed and, after a decade with interest rates buried at 0% and sluggish inflation, central bankers attend their annual meeting in Sintra to do group therapy on the unprecedented escalation that they have staged without lifting the accelerator foot for the last twelve months. Until Wednesday, the main representatives of Western monetary policy will meet in this Portuguese town, the prelude to Jackson Hole, its US counterpart in August.

Its strategy of steadily (and not so slowly) raising interest rates has not served to put pressure on prices so far; at least not to where Frankfurt expects, at levels of 2%. In June 2022, the Eurozone CPI exceeded levels of 8%. Today this reference is still above 6% and the downward path seems more complicated once unbound energy prices (gas, essentially) have been shaken off and with the controlled shopping basket, according to recognized the president of the European Central Bank (ECB), Christine Lagarde, after the last meeting of the organization.

For this reason, perhaps the central issue of the Forum is ‘Macroeconomic stability in a context of volatile inflation’, not to use the term sticky [o sticky, como gusta llamar en el mundo financiero] which is the most graphic way of intoning what Lagarde already said in her latest statements, which is that prices will remain high for much longer than desired. So much so that the Bank of England surprised the market last week by raising rates by 50 basis points, to 5%, from 2008 levels.

In this year’s photo, next to the colorful walls of a Sintra tourist, will weigh the shadows of ten increases undertaken by the Federal Reserve -which was ahead of the Eurozone and began as early as March 2022- and another eight carried out by the ECB since last July, which has led the reference rates to levels of 4% in the Old Continent and up to the range of 5%-5.25% in the case of the Federal Reserve, which gave a little breather at their June conclave. In any case, both Lagarde and Jerome Powell have confirmed that there will be more, although the ceiling of ascents is almost within reach. In July it is taken for granted that the ECB will undertake its ninth straight rise, up to the maximum of 4.25% in the year 2000, and another in September is not ruled out.

But one of the key questions is whether they will change a recipe of decades. Central bankers are forcing a technical recession to achieve the one thing Christine Lagarde is losing sleep over: bring inflation back to 2%. The steps to follow are simple: a rise in rates that cuts the granting of credit, curbs consumption and induces an economic slowdown. The problem is that they go too far -the impact on the economies occurs with a delay of 18 to 24 months-, they impact unemployment (at a record low of 6.5% in the Eurozone) and everything results in a delinquency that affect the banking sector, which, clearly, would become a new economic crisis.