Monetary leaders have called for modesty in the fight against inflation.

“Monetary policy is not a pure science.

It is also art,” said ECB President at an event in Sintra, Portugal.

"The economic models have weaknesses." Lagarde encouraged monetary policymakers to address the causes of the recent misjudgment of the risk of inflation: "It's a useful exercise." Among other things, the ECB underestimated the rise in energy prices.

Gerald Braunberger


  • Follow I follow

Bank for International Settlements (BIS) Director General Agustin Carstens picked up the ball.

“We understand inflation a little better now than we used to, but we don't understand everything.

We have long debated the importance of aggregate demand for inflation and economic growth.

It is now necessary to deal more closely with the overall economic supply.” The usual economic models in monetary policy were not able to predict such a sharp increase in the inflation rate within a short period of time.

"We now understand better why we know so little about inflation," said US Federal Reserve Chairman Jerome Powell.

"We thought that post-pandemic, the supply issues would go away faster."

According to the ECB President, there will be no return to the earlier days when strong economic forces helped keep inflation rates very low and monetary policy was busy pushing a near-zero inflation rate close to its target of 2 push percent.

"The landscape has changed," stated Lagarde, who named the disruptions in the global economy and the ecological transformation of the economy as causes for this, among other things.

Powell also saw the build-up of geopolitical and economic rivalries as a cause that, together with the demographic development in many countries, could contribute to a combination of weak productivity growth and low economic growth.

The current growth momentum in the United States, however, worries Powell about its strength.

In view of the very high inflation, monetary policy must dampen economic growth in order to rebalance supply and demand in the American economy.

The central bank wants to control this process in such a way that it does not lead to a recession.

"But there is no guarantee that this will succeed," warned Powell.

However, according to Andrew Bailey, Governor of the Bank of England, there is no alternative to a hands-on monetary policy.

In the longer term, it would be more damaging for the economy to let inflation run wild, Bailey observed: "We will therefore react vigorously if it proves necessary." The Brit also believes that the central banks have to adapt to a different environment.

The pandemic will affect labor markets in the long term, he said.

This also applies to changes in the European security architecture as a result of the war in Ukraine: "These structural changes are very important."

According to Powell, the American Federal Reserve does not pay attention to the exchange rate.

In the United States, the Department of Treasury monitors the exchange rate, he said.

An appreciation of the dollar certainly reduces the potential for inflation in the United States, but this effect should not be overestimated.

Carsten emphasized that the dollar exchange rate is of great importance for many developing and emerging countries, partly because many countries borrowed in dollars and the American currency plays a major role in cross-border payments for raw materials.