Volker Wieland sees no need for an ECB interest rate cut in October (FAZ)

In CEPR Discussion Paper 19521 and IMFS Working Paper 209 “Policy Rules and the Inflation Surge: The Case of the ECB”, the economists analyze the ECB's interest rate decisions during and after the inflation surge and compare them with the recommendations resulting from the application of monetary policy rules such as the Taylor rule and the Orphanides-Wieland rule. These rules can be used to derive how a central bank should react to certain inflation trends or gross domestic product.

“The Taylor rule gives an interest rate recommendation for the interest rate level relative to an equilibrium interest rate. It is therefore particularly useful because it gives a signal for an appropriate interest rate level,” explains Wieland. “The Orphanides-Wieland rule gives a recommendation for a change in interest rates based on the existing level, for example in the last quarter, if you calculate this for quarters.” The advantage of the Orphanides-Wieland rule is that it does not require r*, i.e. the real equilibrium interest rate, a component of the Taylor rule that is, however, very uncertainly estimated.

“Another advantage is that it doesn't need a potential level, only the potential growth. But the disadvantage is that you don't get a recommendation for the level regardless of the last level. That's why it makes sense to use both rules and compare them.” When comparing the development of inflation in the euro area with monetary policy decisions, Wieland and Tatar come to the following conclusion: “In the early phase of the 2021 inflation wave, the central bank should have raised interest rates more quickly.”

According to Wieland and Tatar, the monetary policy rules for the ECB's next monetary policy meeting in October indicate “that key interest rates should not fall as quickly as the interest rate forecasts based on derivatives suggest”. As a result, Wieland does not see the need to cut interest rates at the October meeting. “There would be time to wait until the December meeting, when a new ECB staff forecast will also be presented to the Council.”

FAZ: "Ein kritischer Blick auf die Politik der EZB"

IMFS Working Paper 209: "Policy Rules and the Inflation Surge: The Case of the ECB"