Oireachtas Joint and Select Committees

Wednesday, 10 November 2021

Committee on Budgetary Oversight

Inflation: Discussion

Professor Karl Whelan:

It is about the timing of the ECB's actions. The ECB will not move quickly. Professor Lane's strongly worded interventions over the past few days can be taken as indicative of the stance of the ECB's president, Ms Christine Lagarde, and the majority of its governing council. The ECB will not start raising interest rates immediately as the first policy reaction. Currently, it is still pursuing its quantitative easing programmes, its purchasing of government and corporate bonds and other measures. All of this is contributing to lower interest rates for government borrowing and so on. The first step the ECB will take is winding those programmes down. It will not shut them down immediately. Rather, it will announce a schedule by which it will slow the pace of purchases and then stop them. After that, it will think about raising interest rates. I suggest that next summer would be the very earliest that we would see an actual interest rate increase in the wild. If I knew, though, then I would run my own bond fund and collect lots of money.

Suffice it to say that for many people who are on variable rate mortgages or relying on the very cheap finance conditions of recent years, an interest rate increase could be a shock. If it comes to pass, we will probably find that many financial institutions that have taken positions that are dependent on interest rates being very low for a long time will be caught on the hop. Relative to what people have expected the ECB to do, it would be a fast turnaround if it was raising interest rates by next summer. Perhaps it can do that and avoid engineering a recession. There are plenty of historical examples of central banks raising interest rates to squeeze inflation out of the system and recession being a by-product. When I was an economist in short pants, that was the stereotypical recession. It was a boom-bust cycle. There was inflation during the boom, a central bank stepped in to take away the punch bowl and then there was a recession. As such, there would be a number of concerns. Knowing that a relatively fast changing of pace in monetary policy could be damaging is one reason the ECB is so reluctant to talk now about doing that.