Nope, I would expect it to do close to nothing to inflation.

The current inflation is primarily caused by high energy prices, secondary by shortages (semiconductors, grain, vegetable oils, etc) and third (delayed effect) higher wages due to worker shortages.

In theory, a rate hike reduces demand. But it won't for the above goods and services as they're barely optional. People are going to continue to heat their houses, vehicles will keep moving, factories won't be shut down at scale. People won't stop eating either.

I believe the much more aggressive rate hikes by the FED, multiple already, validate this point. It's not done nothing to reduce inflation.

I'm thinking it's going to be energy savings (by consumers and industry) and working on energy alternatives/abundance to really kill high inflation.

Another example of a non-working instrument: here in the Netherlands the long term mortgage rate (15-20 year fixed rate) has more than tripled in just 4 months time. It doesn't even move the needle in house prices. It has slightly slowed down growth, and that's it. The reason it doesn't work is because there's no supply and the demand is not that elastic. People need a place a live.

> I believe the much more aggressive rate hikes by the FED, multiple already, validate this point. It's not done nothing to reduce inflation.

It's way too early to make this claim. Fiscal policy such as setting interest rates has been studied and projected to take anywhere from 9 months to 24 months to see an effect on inflation metrics such as CPI. We won't know if what the Fed has done will have its desired effect until much later. We can only do what has been observed to have worked in the past and hope other secondary inflation drivers (i.e. supply shortages, commodities crisis) continue to die down.

[1] https://www.lancaster.ac.uk/staff/ecajt/inflation%20lags%20m...

inflation is dependent upon what money can buy, the amount of money, and the velocity of it. I agree generally with everything you said, with the addition that the euro supply had rather significant ~7% "leap" in early 2020 (in addition to the trend line of compound growth). I don't think the effect of this "money printing" effect can be discounted either.

https://www.statista.com/statistics/921364/value-of-m2-money...

At least in Europe it’s more company profits rather than wage raises that cause inflation. In Germany tax revenues went up 10% for wage taxes while going up 30% for company profits last year.

In Germany apartment prices went down in few cities with an overheated market. If prices stagnate long enough inflation effectively makes prices go down like in Germany from 2000 to 2010

True, the relation between wages and inflation is complicated.

A lot of companies in Germany (same in the Netherlands) are exporters. The products they produce are not consumed by local consumers, hence higher wages do not increase local inflation.

Similarly, for some companies wages are a limited part of their expenses. Some factories have like 10 workers to produce millions of items of output.

I think the purpose of raising interest rates is mainly to bring inflation expectations down and stop the wage price spiral. If central banks fail to achieve that goal then inflation is going to last many more years.

Nobody expects interest rate hikes to have an immediate, direct effect on prices. The immediate effect it is supposed to have is not on energy prices but on wage negotiations.

The current inflation isn't caused by wages, it's caused by energy prices.

Exactly, energy and the aftermath of covid. But central banks can't do much about that. What they're trying to do is stop the next round of inflation that would be caused by wage rises if everyone is fully compensated for the current round of inflation expecting the round after that to follow suit.

If these expectations become entrenched the cycle is very hard to break. Only a severe recession with high unemployment will work at that point and nobody wants that.

I believe the plan is to increase the rate in steps over time as to not shock the marketplace and also be able to see how market conditions change between steps.

This seems like having your cake and eating it too. Because of our unprecedented bubble caused by low interest rates, what happened was our markets got even more sensitive to rate rises.

You can already see the impact of this in the real estate market. Its not pretty and i believe they will play hot potatoes until the next administration can take the blame. Don't know how it is in EU but probably similar dynamics.

Nobody wants to be that guy who takes the fall for the next recession. It's going to last a long time and lot of people seem like they are poised to buy the dip again like they have before.

Remember that markets falling to 40% isn't an outright meltdown but we've had it fall far past 50%, 80% was the biggest fall and that is the more likely scenario.

Sounds like they’ll just end up behind the curve the whole time?

Well, it's a "medium term" goal. Medium term in economics generally refers to a timescale of 2-10 years. Pushing the inflation down to 2% this year would be unreasonable, but they may be able to push the inflation rate down below 2% in the upcoming years to at least partially compensate for the high inflation rate this year.

The argument is that the inflation in the Eurozone is driven much more by rising commodity prices than the demand-side inflationary pressures that the US/UK have been experiencing. It's generally accepted by central bankers that commodity prices can fluctuate and therefore there is less of a need to aggressively fight commodity-driven inflation.

So yeah, I think if by medium term you mean 1-2 years, it's certainly possible. Short-term there's basically nothing any single central bank can do about commodity inflation anyway. Lowering economic demand in the EU as a means to tackle high global commodity prices is a questionable strategy when the continent is on the brink of recession. They're screwed either way though.

Not even close. The central banks of the western world are playing a very dangerous game.

The high inflation rate comes from several factors pushing together at the moment. On the one side, the policy of cheap money had to come to an end. On the other side, there is the war and the energy shortage as well as the global economy still suffering due to the pandemic. One could reasonably hope that the effects of the war, energy shortage and pandemic are coming to an end, reducing that pressure onto prices. If e.g. Russia continues to sell gas to Europe, energy prices shouldn't rise much further.

The article states that they increased rates by 0.5pp, not 0.5%, but probably not. Rule of thumb says that interest rates need to exceed the rate of inflation to see inflation come down.

I checked and it mentions 50 basis points and a basis point is "is equal to 1/100th of 1% or 0.01%", so for 50 bp 0.5% seems right.

50 basis points is 1/100th of a percentage point (pp), not a percentage (%).

What are you talking about? 50 basis points is 0,5%.

It can be. 50bp is always equivalent to 0.5pp, but only sometimes equivalent to 0.5%. A % increase is dependent on relative change. The increase from 0.25 to 0.75 talked about in the article, for example, is a 200% increase, a 0.5pp increase, and a 50bp increase. The difference between 0.75% and 0.25% is not represented as a %. That is now how % is calculated.

You did not define what your percentage applies to in your comment. Everyone here is talking about interest rate, not interest rate increase rate.

The topic of conversation here is how the European Central Bank increased rates by 0.5 percentage points, which may also be stated as 50 basis points as a percentage point is 1/100th of a basis point. The European Central Bank did not raise any of its rates by 0.5 percent. The previous commenter, among others, merely mixed up percent (%) and percentage point (pp), is all. It's a common mistake, editorialized headline included.