Editorial | Oct 02,2021
May 21 , 2022
By Christian Tesfaye
Inflation has been reintroduced into discussions in the rich world. Since the 1990s, inflation was a phenomenon of bygone eras that did not affect highly sophisticated economies. By the 2010s, central banks were having a hard time reaching their inflation targets and were led to reducing interest rates to near-zero – a policy that led to an unprecedented time of cheap money in the global financial system.
No more. It seems that the old monetarists are having the last laugh. It turns out printing lots of money, whatever the growth level of an economy, does lead to inflation. But not so fast. While it is dangerous to increase the money supply too much, it was probably still a better trade in the face of the impacts of COVID-19. Somewhere in the multiverse, there is an earth with mass unemployment and global productivity decline not seen since the Great Depression because central banks failed to stimulate national economies. If central banks are to be criticised, it is for their assumption that the inflation was “transitory” and failing to tighten earlier.
Now that the trade has been made, and there is no going back, what can be done?
Growth in the money supply is not the only driver of inflation at the moment. There is also a massive supply shock to basic items such as fuel, edible oil, wheat and fertiliser. But this was also the case in the 1970s and ‘80s. In the US, high levels of spending (social support and the Vietnam War) combined with oil supply shocks that arose as a result of the 1973 oil embargo and the 1979 Iranian revolution produced stubborn inflation. It was bad luck and a bit of policy miscalculation.
It is still no excuse for central banks to fail to act. Now that inflation is back, most central bankers look to the lessons of a peculiar looking fellow, the late Paul Volcker. He stood at over two meters tall and had to look down at the US presidents he met; the massive rectangular frame glasses he wore over a very prominent nose gave him a distinct feature.
Volcker made his name as the chair of the Federal Reserve, the equivalent of a central bank in the US. He was hired for the job at a time of stagflation. He introduced his hammer and made it his duty to bring down inflation by hook or crook. His weapon of choice was interest rates. Against double-digit inflation, he nearly doubled the rate at which banks lend to one another. The prime lending rate (which is similar to average lending rates in Ethiopia) also rose to 21.5pc. Both of these went above the peak of the US rate of inflation, which was almost 15pc. But, in the aftermath of the war between inflation and the central banker, inflation went down to three percent in a few years. Volcker is largely credited for this.
But no war is without its costs, even to the victor. There is another trade to stamping down inflation so ruthlessly and effectively, and this is recession. During his time, the high borrowing costs led to recession and high unemployment rates. Combined with Reagonomic tax cuts, it also led to a rise in sovereign debt the US grapples with decades later.
The lessons should be invaluable for officials at the National Bank of Ethiopia (NBE). They are between a rock and a hard place. The public hates inflation, which should lead the central bankers to assume that they need to wage war against the phenomenon by raising interest rates. The floor of the benchmark savings interest rate needs to be at least doubled. But this will further dampen business activity and worsen unemployment. The public will also not like this. It is a headache. But nobody said the job of central banks is easy.
PUBLISHED ON
May 21,2022 [ VOL
23 , NO
1151]
Editorial | Oct 02,2021
Fortune News | Apr 30,2021
Fortune News | Nov 06,2021
Fortune News | Sep 10,2021
Fortune News | Jan 15,2022
Fortune News | Apr 03,2021
Fortune News | Jan 23,2021
Radar | Sep 10,2021
Sunday with Eden | Dec 19,2021
Radar | Oct 09,2021
Photo Gallery | 97548 Views | May 06,2019
Photo Gallery | 89784 Views | Apr 26,2019
My Opinion | 67441 Views | Aug 14,2021
Commentaries | 65855 Views | Oct 02,2021
Editorial | May 02,2024
Feb 24 , 2024 . By MUNIR SHEMSU
Abel Yeshitila, a real estate developer with a 12-year track record, finds himself unable to sell homes in his latest venture. Despite slash...
Feb 10 , 2024 . By MUNIR SHEMSU
In his last week's address to Parliament, Prime Minister Abiy Ahmed (PhD) painted a picture of an economy...
Jan 7 , 2024
In the realm of international finance and diplomacy, few cities hold the distinction that Addis Abeba doe...
Sep 30 , 2023 . By AKSAH ITALO
On a chilly morning outside Ke'Geberew Market, Yeshi Chane, a 35-year-old mother cradling her seven-month-old baby, stands amidst the throng...
May 2 , 2024
For successive generations of Ethiopia's tax authorities, the chore of tax collection...
Apr 27 , 2024
The Prosperity Party (PP) - Prosperitians - is charting a course through treacherous...
Apr 20 , 2024
In a departure from its traditionally opaque practices, the National Bank of Ethiopia...
Apr 13 , 2024
In the hushed corridors of the legislative house on Lorenzo Te'azaz Road (Arat Kilo)...
May 3 , 2024
The feel-good life coaching industry would have people believe that success is not only about showing up in the swirling whirl of modern lif...
May 4 , 2024 . By BERSABEH GEBRE
Brook Taye (PhD), the director general of the newly established Ethiopian Capital Market Authority (ECMA), has issued a stern warning to com...
May 4 , 2024 . By MUNIR SHEMSU
Dreams of an agriculture sector unshackled from the whims of rain remain tethered to the struggling Minis...
May 4 , 2024
Large public projects exceeding 250 million Br will be required to use Building Information Modelling (BI...