While the European Central Bank has hiked interest rates rapidly to make up ground in its fight against resurgent inflation, it is having a harder time reversing years of massive asset purchases. How can policymakers remove surplus liquidity without creating even bigger problems?
WÜRZBURG – It is now widely acknowledged that most central banks underestimated the threat of inflation when they persisted with extremely low interest rates and massive asset purchases throughout 2021 and into 2022. Fortunately, when they did finally change course, they showed remarkable determination, with the European Central Bank raising interest rates by 375 basis points in less than a year (and the US Federal Reserve raising its policy rate by 500 basis points).
WÜRZBURG – It is now widely acknowledged that most central banks underestimated the threat of inflation when they persisted with extremely low interest rates and massive asset purchases throughout 2021 and into 2022. Fortunately, when they did finally change course, they showed remarkable determination, with the European Central Bank raising interest rates by 375 basis points in less than a year (and the US Federal Reserve raising its policy rate by 500 basis points).