Ilustrācija — Shutterstock.
Inflation is coming down quite quickly and the European Central Bank (ECB) has certainly been busy raising interest rates no fewer than 10 times in the past 14 months in order to quell inflation. In fact, never before has the ECB raised rates so many times in a row – the previous record was nine times back in 2006-2008.
But this comes on the back of a central bank that was very reluctant to raise rates in the first place, see Figure 1. Inflation in the Euro Area went above the bank’s medium-term target of 2% year-on-year in July 2021 but the bank maintained ultra-low interest rates for a whole year before starting its rates rises – at a time when, in July 2022, inflation had reached 8.9% in the Eurozone and 21.3% here in Latvia, see again Figure 1.
Back in 2021 there was among many a widespread belief that an uptick in inflation was a transitory phenomenon due to the opening up of the economies after Covid-19. As demand returned, supply just couldn’t keep up right away, leading to higher inflation, but this would dissipate fast, as supply chains would be restored. That was the “Team Transitory” story – the other side, dubbed “Team Permanent”, obviously, argued that inflation would be not permanent, but certainly persistent as it was a result of too much fiscal and monetary stimulus following Covid-19. Too much demand chasing too little potential supply.
