Joachim Nagel, president of Germanys Bundesbank and a member of the European Central Bank’s rate-setting committee said in late February that underlying inflation in the eurozone was still 2 percentage points higher than its 1999 to 2019 average.

“If we reduce interest rates too early or too sharply, we run the risk of missing our target,” and might need to raise interest rates again, the Wall Street Journal quoted Nagel as saying. He highlighted a recent International Monetary Fund report that found four out of every 10 inflation shocks since the 1970s had yet to be overcome even after five years.

The newspaper pointed out that central banks themselves may be inadvertently adding to inflation pressure. By signaling a pivot toward interest-rate cuts last fall, they pushed global borrowing costs down and asset prices up, supporting spending.

Some factors favor inflation declining further. In both the US and Europe, a surge of immigration could help keep a lid on wage increases, it added.

Higher government
spending on defense and green energy, and geopolitical tensions that crimp global trade, are likely to pressure central banks to tolerate higher inflation over the coming years, according to a Brookings Institution paper published in March.

“A strengthening of central bank independence combined with a more credible public debt policy is likely needed,” said the paper, by economist Kenneth Rogoff of Harvard University and three co-authors.

If central banks react to stubborn inflation by backing away from rate cuts, that would put pressure on both heavily indebted governments and employers. That could test central banks’ will to finish the last mile and push inflation all the way to target, the newspaper said.

Source: Qatar News Agency