Inflation catches financial regulators off-guard forcing them to adjust monetary policies accordingly. A few years ago before the COVID pandemic, both advanced and developing economies tackled the thorny issue of low inflation. Therefore, major and less influential central banks around the world adopted policies to create the conditions for steady price growth and to drive inflation rates up to official targets.
Nowadays, central banks are engaged in the crusade against soaring inflation. Despite aggressive monetary tightening, they are not able to push their annual rates to official targets. The US and Europe are suffering the most from the fallout from stubborn inflation. At first glance, it seems that the US is bearing the brunt of it, but in fact, Europe is paying the heaviest price.
The European Central Bank has to determine monetary policy for 20 countries with the euro in circulation. Thus, it is complicated to fine-tune the policy settings, bearing in mind the state of affairs in each of the 20 eurozone countries. Nevertheless, the ECB is widely expected to announce another rate hike soon, even though interest rates have already increased to a record level since 2001.
In parallel, the Federal Reserve has been also raising interest rates, having increased the official funds rate to above 5% from almost zero since March 2022. Two more rate hikes are in the cards until the end of 2023. Analysts are voicing concern about the opposite effect of high borrowing costs. Such aggressive monetary tightening might exacerbate inflation.
