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> the Governing Council took further key steps to make sure inflation returns to its 2% target over the medium term. Is raising rates by 0.5% anywhere near eno

> the Governing Council took further key steps to make sure inflation returns to its 2% target over the medium term. Is raising rates by 0.5% anywhere near enough to get inflation to 2%, given that inflation is currently at 8.6%? https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area https://ec.europa.eu/eurostat/statistics-explained/index.php...

nathanaldensr 4y ago
Not even close. The central banks of the western world are playing a very dangerous game.
dsm4ck 4y ago
I believe the plan is to increase the rate in steps over time as to not shock the marketplace and also be able to see how market conditions change between steps.
- lazide 4y ago
  Sounds like they’ll just end up behind the curve the whole time?
- upupandup 4y ago
  This seems like having your cake and eating it too. Because of our unprecedented bubble caused by low interest rates, what happened was our markets got even more sensitive to rate rises. You can already see the impact of this in the real estate market. Its not pretty and i believe they will play hot potatoes until the next administration can take the blame. Don't know how it is in EU but probably similar dynamics. Nobody wants to be that guy who takes the fall for the next recession. It's going to last a long time and lot of people seem like they are poised to buy the dip again like they have before. Remember that markets falling to 40% isn't an outright meltdown but we've had it fall far past 50%, 80% was the biggest fall and that is the more likely scenario.
randomdata 4y ago
The article states that they increased rates by 0.5pp, not 0.5%, but probably not. Rule of thumb says that interest rates need to exceed the rate of inflation to see inflation come down.
- deleted 4y ago
  [deleted]
- mejutoco 4y ago
  I checked and it mentions 50 basis points and a basis point is "is equal to 1/100th of 1% or 0.01%", so for 50 bp 0.5% seems right.
  - randomdata 4y ago
    50 basis points is 1/100th of a percentage point (pp), not a percentage (%).
    - phylomortis 4y ago
      What are you talking about? 50 basis points is 0,5%.
      - randomdata 4y ago
        It can be. 50bp is always equivalent to 0.5pp, but only sometimes equivalent to 0.5%. A % increase is dependent on relative change. The increase from 0.25 to 0.75 talked about in the article, for example, is a 200% increase, a 0.5pp increase, and a 50bp increase. The difference between 0.75% and 0.25% is not represented as a %. That is now how % is calculated.
        illiac786 4y ago
        You did not define what your percentage applies to in your comment. Everyone here is talking about interest rate, not interest rate increase rate.
_ph_ 4y ago
The high inflation rate comes from several factors pushing together at the moment. On the one side, the policy of cheap money had to come to an end. On the other side, there is the war and the energy shortage as well as the global economy still suffering due to the pandemic. One could reasonably hope that the effects of the war, energy shortage and pandemic are coming to an end, reducing that pressure onto prices. If e.g. Russia continues to sell gas to Europe, energy prices shouldn't rise much further.
lancebeet 4y ago
Well, it's a "medium term" goal. Medium term in economics generally refers to a timescale of 2-10 years. Pushing the inflation down to 2% this year would be unreasonable, but they may be able to push the inflation rate down below 2% in the upcoming years to at least partially compensate for the high inflation rate this year.
fleddr 4y ago
Nope, I would expect it to do close to nothing to inflation. The current inflation is primarily caused by high energy prices, secondary by shortages (semiconductors, grain, vegetable oils, etc) and third (delayed effect) higher wages due to worker shortages. In theory, a rate hike reduces demand. But it won't for the above goods and services as they're barely optional. People are going to continue to heat their houses, vehicles will keep moving, factories won't be shut down at scale. People won't stop eating either. I believe the much more aggressive rate hikes by the FED, multiple already, validate this point. It's not done nothing to reduce inflation. I'm thinking it's going to be energy savings (by consumers and industry) and working on energy alternatives/abundance to really kill high inflation. Another example of a non-working instrument: here in the Netherlands the long term mortgage rate (15-20 year fixed rate) has more than tripled in just 4 months time. It doesn't even move the needle in house prices. It has slightly slowed down growth, and that's it. The reason it doesn't work is because there's no supply and the demand is not that elastic. People need a place a live.
- legulere 4y ago
  At least in Europe it’s more company profits rather than wage raises that cause inflation. In Germany tax revenues went up 10% for wage taxes while going up 30% for company profits last year. In Germany apartment prices went down in few cities with an overheated market. If prices stagnate long enough inflation effectively makes prices go down like in Germany from 2000 to 2010
  - fleddr 4y ago
    True, the relation between wages and inflation is complicated. A lot of companies in Germany (same in the Netherlands) are exporters. The products they produce are not consumed by local consumers, hence higher wages do not increase local inflation. Similarly, for some companies wages are a limited part of their expenses. Some factories have like 10 workers to produce millions of items of output.
- notch656a 4y ago
  inflation is dependent upon what money can buy, the amount of money, and the velocity of it. I agree generally with everything you said, with the addition that the euro supply had rather significant ~7% "leap" in early 2020 (in addition to the trend line of compound growth). I don't think the effect of this "money printing" effect can be discounted either. https://www.statista.com/statistics/921364/value-of-m2-money-supply-in-euro-area/ https://www.statista.com/statistics/921364/value-of-m2-money...
kypro 4y ago
The argument is that the inflation in the Eurozone is driven much more by rising commodity prices than the demand-side inflationary pressures that the US/UK have been experiencing. It's generally accepted by central bankers that commodity prices can fluctuate and therefore there is less of a need to aggressively fight commodity-driven inflation. So yeah, I think if by medium term you mean 1-2 years, it's certainly possible. Short-term there's basically nothing any single central bank can do about commodity inflation anyway. Lowering economic demand in the EU as a means to tackle high global commodity prices is a questionable strategy when the continent is on the brink of recession. They're screwed either way though.

nathanaldensr 4y ago

Not even close. The central banks of the western world are playing a very dangerous game.

dsm4ck 4y ago

I believe the plan is to increase the rate in steps over time as to not shock the marketplace and also be able to see how market conditions change between steps.

lazide 4y ago
Sounds like they’ll just end up behind the curve the whole time?
upupandup 4y ago
This seems like having your cake and eating it too. Because of our unprecedented bubble caused by low interest rates, what happened was our markets got even more sensitive to rate rises. You can already see the impact of this in the real estate market. Its not pretty and i believe they will play hot potatoes until the next administration can take the blame. Don't know how it is in EU but probably similar dynamics. Nobody wants to be that guy who takes the fall for the next recession. It's going to last a long time and lot of people seem like they are poised to buy the dip again like they have before. Remember that markets falling to 40% isn't an outright meltdown but we've had it fall far past 50%, 80% was the biggest fall and that is the more likely scenario.

randomdata 4y ago

The article states that they increased rates by 0.5pp, not 0.5%, but probably not. Rule of thumb says that interest rates need to exceed the rate of inflation to see inflation come down.

deleted 4y ago
[deleted]
mejutoco 4y ago
I checked and it mentions 50 basis points and a basis point is "is equal to 1/100th of 1% or 0.01%", so for 50 bp 0.5% seems right.
- randomdata 4y ago
  50 basis points is 1/100th of a percentage point (pp), not a percentage (%).
  - phylomortis 4y ago
    What are you talking about? 50 basis points is 0,5%.
    - randomdata 4y ago
      It can be. 50bp is always equivalent to 0.5pp, but only sometimes equivalent to 0.5%. A % increase is dependent on relative change. The increase from 0.25 to 0.75 talked about in the article, for example, is a 200% increase, a 0.5pp increase, and a 50bp increase. The difference between 0.75% and 0.25% is not represented as a %. That is now how % is calculated.
      - illiac786 4y ago
        You did not define what your percentage applies to in your comment. Everyone here is talking about interest rate, not interest rate increase rate.

_ph_ 4y ago

The high inflation rate comes from several factors pushing together at the moment. On the one side, the policy of cheap money had to come to an end. On the other side, there is the war and the energy shortage as well as the global economy still suffering due to the pandemic. One could reasonably hope that the effects of the war, energy shortage and pandemic are coming to an end, reducing that pressure onto prices. If e.g. Russia continues to sell gas to Europe, energy prices shouldn't rise much further.

lancebeet 4y ago

Well, it's a "medium term" goal. Medium term in economics generally refers to a timescale of 2-10 years. Pushing the inflation down to 2% this year would be unreasonable, but they may be able to push the inflation rate down below 2% in the upcoming years to at least partially compensate for the high inflation rate this year.

fleddr 4y ago

Nope, I would expect it to do close to nothing to inflation. The current inflation is primarily caused by high energy prices, secondary by shortages (semiconductors, grain, vegetable oils, etc) and third (delayed effect) higher wages due to worker shortages. In theory, a rate hike reduces demand. But it won't for the above goods and services as they're barely optional. People are going to continue to heat their houses, vehicles will keep moving, factories won't be shut down at scale. People won't stop eating either. I believe the much more aggressive rate hikes by the FED, multiple already, validate this point. It's not done nothing to reduce inflation. I'm thinking it's going to be energy savings (by consumers and industry) and working on energy alternatives/abundance to really kill high inflation. Another example of a non-working instrument: here in the Netherlands the long term mortgage rate (15-20 year fixed rate) has more than tripled in just 4 months time. It doesn't even move the needle in house prices. It has slightly slowed down growth, and that's it. The reason it doesn't work is because there's no supply and the demand is not that elastic. People need a place a live.

legulere 4y ago
At least in Europe it’s more company profits rather than wage raises that cause inflation. In Germany tax revenues went up 10% for wage taxes while going up 30% for company profits last year. In Germany apartment prices went down in few cities with an overheated market. If prices stagnate long enough inflation effectively makes prices go down like in Germany from 2000 to 2010
- fleddr 4y ago
  True, the relation between wages and inflation is complicated. A lot of companies in Germany (same in the Netherlands) are exporters. The products they produce are not consumed by local consumers, hence higher wages do not increase local inflation. Similarly, for some companies wages are a limited part of their expenses. Some factories have like 10 workers to produce millions of items of output.
notch656a 4y ago
inflation is dependent upon what money can buy, the amount of money, and the velocity of it. I agree generally with everything you said, with the addition that the euro supply had rather significant ~7% "leap" in early 2020 (in addition to the trend line of compound growth). I don't think the effect of this "money printing" effect can be discounted either. https://www.statista.com/statistics/921364/value-of-m2-money-supply-in-euro-area/ https://www.statista.com/statistics/921364/value-of-m2-money...

kypro 4y ago

The argument is that the inflation in the Eurozone is driven much more by rising commodity prices than the demand-side inflationary pressures that the US/UK have been experiencing. It's generally accepted by central bankers that commodity prices can fluctuate and therefore there is less of a need to aggressively fight commodity-driven inflation. So yeah, I think if by medium term you mean 1-2 years, it's certainly possible. Short-term there's basically nothing any single central bank can do about commodity inflation anyway. Lowering economic demand in the EU as a means to tackle high global commodity prices is a questionable strategy when the continent is on the brink of recession. They're screwed either way though.