ECB’s Müller: Economic Suffering of ECB Decisions Preferable to Persistently Excessive Inflation

22 July 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Madis Müller on Friday said that the ECB realised that policy normalisation would probably imply some economic suffering, but that this was preferable to runaway inflation.

In a blog post on the website of the Estonian central bank, which he heads, Müller said, ‘Negative central bank rates are now history, an important step in the normalisation of monetary policy in the euro area.’

While the central bank cannot hike interest rates so as to reduce inflation rapidly, unless it accepts the consequence of a ‘deep recession’, it is nonetheless important that it ‘reacts quickly enough to the changed economic situation and adjusts its policy in time in case of persistent price pressures’, he said.

Further moves depend on incoming information including the outlook, he said.

‘We understand that these decisions are expected to mean slower economic growth due to more expensive lending and, unfortunately, uncreated and sometimes lost jobs, but the consequences of persistently too fast price increases would be even worse’, he said.

‘At the same time, it is important to understand that even after the central bank's latest decisions, interest rates continue to be favourable for borrowers in historical comparison, especially when looking at the so-called real interest rates adjusted for price increases’, he added.

Müller characterised the ECB’s new anti-fragmentation instrument as giving authorities ‘the possibility to intervene further in bond markets in the event of unwarranted investor panic and a sharp rise in interest rates, regardless of the economic outlook for a country.’