On Monday, ECB Vice President Luis de Guindos stressed the need to quell inflation, arguing that “the main economic problem in Europe is inflation” and that “reducing inflation is the main thing the ECB can do right now.” Guindos also indicated in previous statements that interest rate rises would continue even if there was a eurozone recession.
He argues that the economic contraction is not enough to keep inflation under control, so it is necessary to continue tightening monetary policy to flatline prices with the help of the contraction in the economy itself.
On Tuesday, the European Central Bank raised interest rates further. Philippe Layne, the ECB’s chief economist and a member of its executive board, said in an interview that although officials were not forthcoming, the current tightening of monetary policy would cool the Labour market to prevent wages and hiring from becoming more of a spur to potential inflation. As the economy slows and interest rates rise, the Labour market will start to deteriorate.
Rising interest rates increase a company’s financing costs, reduce the profitability of its operations, and force less solvent/profitable firms to reduce investment and spending. These corporate austerity measures could include wage freezes, reduced working hours or layoffs. Some economists believe that this time around, especially in the US, it is impossible to get inflation back to target without “destroying” the Labour market.
High interest rates have a strong impact on the weak labor market, but the main problem in the euro zone is supply, not demand, so employment will be sacrificed, experts said.
Although experts expect unemployment to increase, economists believe the labor market can also be cooled without needing to generate unemployment, for example, by lowering the job vacancy rate, which is currently soaring, so there is pressure on companies to increase wages for now.
The big risk of monetary tightening is that it affects different countries in the eurozone differently. Spain has lost a lot of jobs in the recession. In addition, Spain’s job vacancy rate is well below the euro-zone average. Recession, higher interest rates and low vacancy rates could be fatal for Spain’s Labour market. Higher interest rates tend to affect lower-income people.
In fact, improving inflation depends primarily on stabilizing energy prices and supply to address the underlying economic problems, rather than on raising interest rates by hurting employment in the labor market.
Post time: Sep-29-2022