In the fight against inflation the ECB, Bank of England and Federal Reserve risk either doing too much too soon, or too little too late
The prospect of the ECB toughening its stance had already alarmed the markets even before a political crisis in the eurozone’s third biggest economy loomed. Investors demanded a higher premium for financing Italy’s huge national debt so – in an echo of events in 2012 – the yield on Italian bonds has risen. The gap – or spread – when comparing with German bond yields can be expected to widen further should Draghi resign.
The weakness of the euro against the US dollar is an added complication, and one reason for the single currencyearlier this month is that US interest rates are already at 1.5%-1.75% while the ECB’s main interest rate is zero. Up until the release of the latest US cost of living data, the assumption on Wall Street was that the Fed chair, Jerome Powell, and his colleagues would repeat June’s 0.75 point increase. However, last week’s news that inflation had jumped to aKrishna Guha, of Evercore, the investment bank advisory firm, said the signs were that the Fed would opt for the smaller 0.75 increase.
The same tricky balancing act – preventing inflation from becoming embedded while at the same time avoiding sending the economy into recession – is causing headaches at the Bank of England, which will be the last of the three central banks to announce its policy decision.
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