How and why central banks are losing the war on inflation
Central banks should set up a more structured monetary policy than the one adopted so far. Here's which one. The analysis of Gianclaudio Torlizzi, founder of T-Commodity
Central banks are losing the war against inflation. After yesterday's speech by Powell, thinking that at this point the Fed could push rates to 7-8% is not at all a far-fetched scenario. On the other hand, even the 6% discount on the markets today a year ago seemed like only a laboratory hypothesis.
The point is that as long as consumer prices remain at current levels (5.6% on a 'core' basis) even a 6% interbank rate is equivalent to only moderately positive real rates and therefore to a paradoxically expansionary monetary policy giving thus a strong hand to the hawks who press further restrictions on the cost of money.
Leaving aside the impact that the violent monetary restriction will have on the real estate market, the greatest criticality would concern the raising of the cost of financing public debts. From this point of view, therefore, the Eurozone is in a worse condition than the USA.
WHAT CAN CENTRAL BANKS DO?
So what to do?
In my opinion, central banks will only have to set up a more structured monetary policy than the one adopted up to now, accompanying the rise in short-term rates with a new form of QE on government bonds. In doing so, while on the one hand downward pressure would be exerted on commodities, by acting on interbank rates, on the other hand, by keeping long-term yields under control, the state accounts would not be put under pressure, putting them in a position to finance the necessary investments for reshoring, energy transition and for the defense sector.
Furthermore, in the specific case, the EU will have to completely review the climate policies to ease tension on the energy and metal markets . From this point of view, when Brussels claims that by 2030 we will reduce our dependence on rare earths to 70% (draft circulated yesterday of the Critical Raw Material Act) I am not at all heartened!
INTERVENE ON THE OFFER
To conclude, in short, only by acting on supply will it be possible to win the war against inflation in the long term. The economic system as they knew it has collapsed (see the centralization of executive power underway in China) and it is necessary to reason with new ways of thinking. If politics does not think about it beforehand, the markets will impose the readjustment. And it won't be pleasant.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/banche-centrali-guerra-inflazione/ on Wed, 08 Mar 2023 12:02:36 +0000.