The 20th anniversary of the euro was marked by an increase in price inflation. In the euro area, annual consumer price inflation reached 5% in December 2021. Lithuania recorded the highest rate of 11%.
The US Federal Reserve System (Fed) has announced that it will raise interest rates. They have been at zero since the start of the pandemic and since the last recession in 2009, they hit their highest level in 2019. But even in 2019, they were very low, with an effective rate of about 2.5%.
Polystyrene, wood, reinforcement steel, and other materials have not only become expensive, but their lack in warehouses indicates that the increase of prices will continue. It is similar with notebooks, bicycles, or maize.
In August, the Bulgarian government adopted a detailed action plan for joining ERM II and the Banking Union and there were some changes1 to the Bulgarian National Bank Act that also seem to lead in this general direction.
The Council of the European Central Bank (ECB) meets on the upcoming Thursday. Despite explicit criticism especially from Germany, no one should expect higher interest rates in the medium term.
Back in 2012, Mario Draghi vowed to do “everything in his power” to save the euro. Four years later that promise seems fulfilled – both the recent moves by the ECB and the market reaction that followed suggest that we are reaching the limit of what monetary policy can achieve in the euro area.
The chairman of the Central Bank of Lithuania will become a member the Governing Council of the European Central Bank, which is responsible for monetary policy for the euro area. Thus, if Lithuania wants to properly represent it‘s interests, it has to join the debate concerning decisions of the ECB.
Clueless looks of politicians will be once again drawn to the ECB. In addition to reports on starting recession, they are supported also by the legend of deflationary spiral that regularly emerges from monetary depths to destroy the shoots of economic success.
Unfortunately, most governments are not using structural solutions; they are using cyclical solutions, such as greater monetary easing.