ifo President Fuest Welcomes ECB Interest Rate Hike and Criticizes Decision to Limit Interest Rate Differentials
ifo President Clemens Fuest welcomes the decision by the ECB to raise its key interest rate by 0.5 percent. “By doing this, the ECB is sending an important signal that it intends to take action against inflation. It helps temper rising inflation expectations among companies and private households. The move also stabilizes the euro exchange rate, which helps ease import prices,” Fuest says. Another positive development was the announcement that further interest rate hikes would follow, depending on how the economy develops.
However, Fuest takes a critical view of the ECB’s decision to limit interest rate differentiation between eurozone countries. “Interest rate differentials are part of a functioning capital market because they reflect different levels of risk, and private investors need to be convinced to take those risks. There is a danger that the ECB is crossing the line into financing government here, jeopardizing its independence and setting the wrong incentives for fiscal and economic policy,” Fuest says. If individual member states get into financial difficulties, he says, it is not the job of the ECB to intervene but rather of euro area national governments and the ESM bailout fund.
“The conditions defined by the ECB that a country must fulfill in order to receive financial support from the ECB are significantly weaker than those of the OMT bond-buying program introduced during the euro crisis, which requires at least an ESM program with far-reaching conditions,” Fuest says. In contrast to the OMT program, the ECB is not bound by any decision of other institutions, so it will inevitably come under massive political pressure to provide fiscal support to individual member states with high debts.
