Prime Ministers Express Concern Over ECB’s Monetary Policy

Prime Ministers Express Concern Over ECB’s Monetary Policy

Lithuanian Prime Minister’s Worries

Lithuanian Prime Minister Ingrida Šimonytė has recently expressed worries about the European Central Bank’s (ECB) traditional monetary policy of raising interest rates. Speaking at the Lithuanian parliament, Seimas, she raised concerns about the significant increases in key interest rates over a brief period. She mentioned that while it’s routine for a central bank to raise interest rates when inflation doesn’t decelerate quickly, the current pace of interest rate hikes is unparalleled.

Interest rates have surged by 4 percentage points within a year, a pace not seen before. Furthermore, Šimonytė noted that the inflation rates witnessed in 2022 were also exceptional. She believes that while the ECB is adhering to its standard procedure, the effects on the real economy might not be entirely beneficial.

The Impact of Rising Interest Rates

Indeed, inflation is slowing down, but the associated increase in borrowing costs and the subsequent impact on the availability of new loans for businesses is problematic, especially with interest rates at their current level. Šimonytė refrained from speculating on what the ECB’s next step might be. Still, she expressed hope that the central bank’s board would modify their approach as soon as possible. The main takeaway is that the Lithuanian Prime Minister is advocating for a change in the ECB’s traditional monetary policy of raising interest rates, suggesting that it could potentially harm the economy.

Italian Prime Minister’s Criticism

Italian Prime Minister Giorgia Meloni also criticized the European Central Bank over repeatedly hiking interest rates to combat inflation, suggesting that the “cure” may be worse than “the disease.” This comes after the ECB raised its interest rates to their highest level in over 20 years, taking the benchmark rate in the euro area to 3.5 percent, the highest since May 2001. Meloni called inflation “a hateful hidden tax” and claimed that the simplistic recipe for rate increases undertaken by the ECB does not seem to be the most correct path.

Views of the Lithuanian Central Bank’s Governor

Gediminas Simkus, the Lithuanian central bank’s governor, has expressed that he expects the European Central Bank’s 10th straight interest rate hike to be the last one in the current cycle. He believes that while the interest rate hike might be painful for some people, it is an appropriate measure to rein in inflation. The decision was based on the inflation outlook in light of the latest data, net inflation, and the impact of ECB decisions on the economy, according to Simkus.

Meloni’s Criticism of ECB’s Policy Approach

Italian Prime Minister Giorgia Meloni criticized the ECB for repeated interest rate hikes, saying it was following a “simplistic” policy approach that could do more harm than good. The ECB raised euro zone interest rates to their highest level in 22 years this month and said a ninth consecutive rate hike was all but guaranteed in July. Meloni argued that inflation was not being caused by an overheating European economy but by external factors such as the war in Ukraine, which had fueled rising energy costs.

Concluding Thoughts

As the ECB continues to raise interest rates as part of its traditional monetary policy, it has faced criticism from various quarters. While central banks typically raise interest rates to combat inflation, the pace and magnitude of the current rate increases have raised concerns. Critics argue that the impact on the real economy and the burden placed on businesses and consumers may outweigh the benefits of slowing inflation. As the debate continues, it remains to be seen how the ECB will respond to these concerns and what impact its decisions will have on the European economy.