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Next Previous M. Zachariadis: The increase of interest rates and other measures against inflation HOME • INSIDER • CYPRUS • M. Zachariadis: The increase of interest rates and other measures by …
Tackling inflation at the Cypriot and European level requires an immediate and drastic increase in interest rates and targeted fiscal measures that will not give it feedback, said Marios Zachariadis, Professor of Economics at the University of Cyprus.
Ο Professor noted that inflation is largely imported, but not exclusively. Any policies should be taken into account that they should not feed back inflation, so as not to be higher than in other Eurozone economies.
“We have a common monetary policy with the other Eurozone countries, we have similar pressures on petroleum products. What differs from country to country is fiscal policy. “So the various expansionary expenditures, the taxes, can lead to higher inflation in one country than in the rest of the Eurozone,” he said.
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Measures targeted at vulnerable groups, not horizontal
One thing we can do, he said, is to avoid expansionary policies, that is, increases in government spending, tax cuts, which are so large that they affect demand and therefore inflation. “Of course, the vulnerable groups of the population, the poorest strata, must be protected. There, I believe, targeted measures are right to be taken, similar to some of those announced. “Because these mattresses are so low-income that they can not reduce demand, consumption further,” he noted.
At the same time, the rest of us should reduce our consumption to the extent that everyone can, either in fuel or electricity. It is now at the individual level how everyone will manage the crisis, said Dr. Zachariadis.
“It is not just a matter of budgeting to take horizontal measures, which increase government spending or reduce taxes, which could lead to higher inflation in one eurozone country than another, reducing its competitiveness, which could lead to a recession.” “Horizontal policies can hurt and targeted measures must be avoided and selected in order to maintain some purchasing power of those most in need,” he said.
He clarified that at both European and Cypriot level, we are not in a recession, so that more horizontal measures are needed and if taken, they will lead to a further increase in inflation.
Inflation, he noted, is not exclusively imported and our actions give him feedback. During the pandemic, expansionary fiscal policy measures were taken, raising government spending and taxes that were needed to some extent but fueled demand and boosted inflation, he said.
Rising interest rates
Dr. Zachariadis pointed out that raising interest rates at the Eurozone level is a necessary part of the solution to tackling inflation, for two reasons. When interest rates rise, demand pushes down. They need to grow fast enough and high enough to hold on to extra demand. The second reason, which is not often mentioned, is to contain the fall of the euro against the dollar. The euro has fallen by 15% in the last year, he noted. It has recovered in the last month and is 12% lower against the dollar.
“US interest rate corrections are slower than the devaluation of the currency, which fuels inflation,” he said. For example, he added, “oil is priced in dollars. “If the euro depreciates against the dollar, oil becomes even more expensive.”
Answering a question whether the increase in interest rates is coming to stay or whether it is a temporary phenomenon to deal with inflationary trends, Dr. Zachariadis answered that the exception was the recent years when there were negative interest rates, a rare phenomenon that always had a form of temporary. Positive interest rates, or even higher than we have historically had, will be needed to contain inflation, he said.
The ECB has been slow to raise interest rates, under pressure from the central banks of Italy and Greece in particular, and Cyprus has agreed to them, according to a Bloomberg report.
As long as the European Central Bank is late in taking action, he continued, it leads to a devaluation of the euro which increases inflation and causes the need for a more practical increase in interest rates in the future. According to him, if inflation is not controlled immediately, then it is integrated into what consumers and businesses expect, with the result that it develops into a permanent or persistent phenomenon.
Therefore, he added, the increase in interest rates is expected to is long-term and the longer it is delayed the greater the need for very high interest rates.
He also pointed out that in Europe inflation is politically managed, as the problems arising from the high public debt of countries such as Greece and Italy are taken into account. “But that's a reason to be much more conservative in our budgets,” he said, “and not to push for interest rate hikes, because in the end interest rate hikes are even bigger.
Asked if Europe could lead to a new debt crisis, Dr. Zachariadis said that there is a debt crisis when there is high public debt, something that happens in Italy, Greece, Cyprus, Belgium and even France, and when there is uncertainty in the markets and Inflation causes uncertainty. At that time, the lending rates of the states, not only of the ECB, increase, as a result of which the debt refinancing is more difficult to service. “This concerns the EU, but the policy of low interest rates can not continue to protect the 3-4 countries,” he said. over the years, it has been exactly the very low levels of inflation for decades. This allowed for relaxation policies. Without low inflation, none of this can continue.
Strengthening control institutions and consumer attention
In the medium term, market watchdogs need to be strengthened. In addition to strengthening the relevant legislation, there should be proper staffing, with people who know the subject in depth and can analyze data, so that they can detect lack of competition or cartel phenomena, suggested Dr. Zachariadis.
Cyprus is at a better level than the European average, he noted, in terms of how flexible the economy is and how quickly prices change, even downwards. However, he added, there are no deterrent penalties for agreed-upon pricing and profiteering, and this needs to be rectified. The first is that there are occasional price increases, even from companies that did not have cost increases. This is a very basic reason for the increase in prices, he noted, and many of the price increases we see are opportunistic strategic pricing of companies.
The second phenomenon, which is also a descendant of the first, when there is a high inflation, is that there is a large dispersion of prices. If we compare different supermarkets or gas stations, there are very big differences in prices. Therefore, it is important for everyone to be careful about what we buy and where it came from because of these phenomena.