US Federal Reserve Chairman Jerome Powell_IMF Worldbank Spring Meetings 2022

Interest rate hikes against inflation?.- Sooner than expected on US Federal Reserve’s agenda while the ECB will decide in June or even later depending on latest data

The US Federal Reserve Chairman, Jerome Powell, advanced that a half-point rate hike is in the cards of the Institution he leads to combat inflation at the IMF on Thursday (April 21) in Washington, DC.

The President of the European Central Bank Christine Lagarde on her side showed cautious on raising interest rates too soon or too high.
Prime Minister of Barbados Mia Mottley said that higher interest rates would have a negative impact on smaller countries ability to repay debt accrued fighting pandemic and urged wealthy countries to look at ways to relieve the burden.

IMF Worldbank Spring Meetings 2022_press conference_21_04_2022
Left to right: Christine Lagarde (ECB President), Christalina Georgieva (IMF Managing Director), Jerome Powell (US Federal Reserve Chairman) and Mulyani Indrawati (Finance Minister of Indonesia). Caption from the 21 April 2022 press conference video provided by the IMF for publishing.

Those are some of the information outcomes from the IMF-World Bank Spring meeting 2022 currently being held in Washington under an hybrid format.

Moving quickly is needed as inflation is much higher than in the 2004-2006 period, Powell points

“The thing I want to say, though, is we really are committed to using our tools to get two percent inflation back. And I think if you look at, for example, if you look at the last tightening cycle, which was a two-year string of 25 basis point hikes from 2004 to 2006, inflation was a little over three percent. So inflation is much higher now, and our policy rate is is still more accommodative than it was then. So it is appropriate, in my view, to be moving a little more quickly. And I also I also think there’s something in the idea of front end loading whatever accommodation one thinks is appropriate. So that does point that points in the direction of 50 basis points being on the table. Certainly, we make these decisions at the meeting and we’ll make a meeting by meeting, but I would say that 50 basis points will be on the table for the main meeting,” said Powell.

Let’s wait until we have the data and then we decide, this is Lagarde’s approach

“Inflation is one component that for us is critically important in order to determine whether inflation expectations are well anchored at around two percent or whether they are at risk of dying occurring. So that’s what I have on my mind all the time, but they’re moving up a little bit, aren’t slated to be fixated on a day. A time in the day doesn’t make any sense to me because once we say that we are data dependent, for goodness sake, let’s wait until we have the data and then we move on to the decide and we’ve agreed on a sequence,” Lagarde said.

Christine Lagarde_ECB President-IMF World Bank Spring Meetings 2022_press conference 21_04_2022
Christine Lagarde (President of the ECB) during the press conference at IMF-Wold Bank Spring meeting 2022.

Luis de Guindos (Vice President of the European Central Bank) answered recently to the question of a possible interest rate increase by the ECB just after the purchase program of the debt of the member states in July pointing that eerything is possible but not necessaryly is going to happen.

“Theoretically everything is possible, ” de Guindos said. “But we need to keep in mind that we have now clearly delinked the end of the APP to the first rate hike, so a rate hike doesn’t need to come automatically once the APP ends. We can have some time in between and we are data-dependent. My opinion is that the programme should end in July and for the first rate hike we will have to see our projections, the different scenarios and, only then, decide. And nothing has been decided so far”…”It will depend on the data we see in June. From today’s perspective, July is possible and September, or later, is also possible. We will look at the data and only then decide.”

Luis de Guindos Vice President ECB
Luis de Guindos (Vice President at the ECB). © ECB

“Our rate-hike cycle will depend on the data. We will act depending on the evolution of inflation. We don’t face any restrictions in that respect.
Inflation expectations and second-round effects are the main factors to look at when setting monetary policy. Two-thirds of the inflation we are suffering now is due to energy prices, so it’s imported inflation. Monetary policy can do very little to deal with this kind of inflation. The main risk is that this type of inflation starts to be more and more persistent and gives rise to second-round effects. We need to monitor this very, very closely.
The longer inflation remains high, the higher the possibility of having wage indexation clauses in the collective bargaining process. We have not seen much in terms of wage increases so far in Europe. But if we start to observe a de-anchoring of inflation expectations and second-round effects, then this is going to be a key element for the future of monetary policy. The Governing Council looks at these data at every meeting,” he added during an interview he answered fot Bloombergon 20th April, now published on the website of the ECB.

Hikes in the interest rates by the USA and the EU put debt repaiment and ODS agenda at risk in developing countries, Mottley underscored

“The reality that these are the things you said to us at the beginning of the pandemic was that you needed us to spend the money, but keep the receipts. And we did, in fact, keep the receipts, with easy to identify COVID specific debt. It should even be easy to identify climate related debt. But what we do because of our high rates of deficit already is to put roots on another international balance sheet. You can perhaps have a pandemic trust and you can have a climate adaptation trust. But the reality is is that what we need is to be able to move it off our balance sheet because if it is on our balance sheet, then it precludes us from being able to achieve the SDGs, which is our normal development trajectory,“ Barbados’ PM Mottley warned.

Minister of Barbados Mia Mottley _IMF Worldbank Spring Meetings 2022_press conference_21_04_2022
Mia Mottley (Minister of Barbados). Image, caption from the IMF video on the press conference.

Not in the same way, but a hike in the interests rate by the US Federal Reserve could impact negatively in the economy of the European Union, as many international trade operations and also the State debt repayments in some cases are denominated in US dollars. So if the US rises the interest rate, the exchange rate and price of the US dollar may become another driver pushing inflation up in other countries as well.

Image over the headline.- Jerome Powell (US Federal Reserve Chairman). Caption of the press conference video provided for publishing by the IMF.

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