"ECB key interest rate hike is no reason to sound the all-clear" - Op-ed by Volker Wieland in "Wirtschaftsdienst - Zeitschrift für Wirtschaftspolitik"

More and more members of the ECB's Governing Council seem to be convinced that the interest rate level is high enough. In case of doubt, it would be enough to leave the central bank interest rate at this level for longer - said ECB Council member Fabio Panetta and his colleague Ignazio Visco from the Banca d'Italia. In an op-ed for "Wirtschaftsdienst - Zeitschrift für Wirtschaftspolitik", Volker Wieland summarizes why there is no reason to sound the all-clear in an article.

Until the end of 2021, the European Central Bank (ECB) tried to dismiss inflation as temporary - just like the Fed, by the way, writes Wieland. Now it is regularly said that the models were to blame. They had lulled the central banks into a false sense of security. According to Wieland, this falls short. "The models of monetary economics are only as good as the questions they are asked. And the questions are the responsibility of the board of governors."

The central bank must consider a range of models, based on historical experience, and match its decisions with strategies that delivered good results across different models, he said. From almost all of the models, he said, follows what is known as the Taylor principle, which requires the central bank rate to rise by more than 1:1 with inflation or short-term inflation expectations.

In implementing this principle, Wieland believes the central bank should not look too far into the future. "It should not be guided by forecasts of where inflation might be in two or three years, but where it is now or where it is likely to be in the next quarter or two."

By taking further interest rate steps toward 5%, the ECB should ensure that inflation declines sustainably, Wieland said. In his view, in terms of risk management, it would be better to tighten a little more than a little less. "The ECB will probably pause at the next meeting. But it should consider further rate hikes after that at the latest."

Wirtschaftsdienst  - Zeitschrift für Wirtschaftspolitik: "Leitzinserhöhung der EZB - kein Grund zur Entwarnung"