Photo/Illutration Christine Lagarde, president of the European Central Bank, meets reporters in Frankfurt, Germany, on July 21. (Asahi Shimbun file photo)

The central banks of Western nations are being hard-pressed to deal with the current rising inflation rates, as they have been obliged to hastily tighten their monetary policies even at the risk of chilling their economies.

The Bank of Japan, in managing its own monetary policy, should take full account of the possible impact on the Japanese economy and draw on the lessons learned in various other nations.

The European Central Bank on July 21 decided to raise its key interest rates for the first time in 11 years. The index of consumer prices in the euro zone posted an 8.6-percent year-on-year rise in June.

ECB President Christine Lagarde told a news conference that Russia’s aggression toward Ukraine, the high inflation rates and other factors are “significantly clouding the outlook.”

Inflation also shows no signs of letting up in the United States, where the Federal Reserve began raising its key interest rates in March. Consumer prices in the country have risen more than 9 percent year on year, the largest increase in about 40 years.

It is worth noting that the key interest rates are being raised with increasing speed in both the United States and Europe.

The ECB raised its key rates by an amount that is double what it had announced in June because, in Lagarde’s words, the central bank “had clear realization of the upside risk to inflation.”

The U.S. Fed also raised its key rates in June by three times the standard increase of 0.25 percentage point, quite unlike in the two previous rate hikes, when the increases were smaller.

Both the ECB and the Fed were slow in starting to tighten the money supply because they both initially believed the rise in prices was only temporary.

But inflation gathered speed while they were sitting back, and both central banks have no choice but to raise their key rates more drastically to make up for their delay, even at the cost of an increased risk of inviting an economic slowdown.

The BOJ, in the meantime, on July 21 decided to maintain its large-scale monetary easing measures.

On the same occasion, the central bank also revised its projections for this fiscal year’s rise in the consumer price index, for all items except perishables, upward to 2.3 percent year on year, but said the inflation rate will drop to 1.4 percent in fiscal 2023.

A rise in the prices of familiar products will certainly weigh on household finances, but the inflation rate remains lower than in the Western nations and will stay above the 2-percent target only for a limited period of time, BOJ officials apparently envisaged.

The officials likely reasoned it is therefore sensible, at the present stage, to stick to the easy monetary policy to bolster demand and lead prices to rise stably, hopefully in tandem with wage increases. 

That scenario is understandable by and large. We cannot, however, afford to be too optimistic or too complacent.

The BOJ believes the inflation is only temporary because it expects the rise in energy prices to flatten off in time.

But the future course of the Ukrainian crisis, one of the main factors behind the global inflation, remains anything but certain. It should also be noted that price hikes have been seen in a broad range of product items, partly also because of the weakening yen.

On a separate front, it also appears anything but certain if the Western nations will manage to achieve the double goals of curbing inflation and keeping their economies growing. It is highly probable that they will have to react quickly to developments on both fronts.

The BOJ should realize fully that, given the situation we are in, the central bank should keep its eye on the future movements of commodity prices and consider, for starters, the option of softening its approach to monetary easing and review its guidelines for the future.

--The Asahi Shimbun, July 24

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