As time goes on, and interest rates show no signs of abating, the impatience of the business environment and the public is starting to grow. Both are seeing their budgets hit by rising credit financing costs, eroding the amounts available for investment or consumption, Radu Krachun writes in his blog. These frustrations force politicians to become the mouthpiece of expectations and, unfortunately, where possible, influence the decisions of central banks.

I say “unfortunately” because in a consolidated democracy central banks are protected from any political influence that can only have bad consequences. Turkey, whose inflation has been completely out of control for years, is a vivid example of the consequences caused by the activities of a politically oriented central bank.

Another example from the same category was offered to us by a country closer to Romania from a political and economic point of view: Poland. Six weeks before the recent elections, the National Bank of Poland proposed to cut the key interest rate by 0.75 percentage points to 6%, despite inflation above 10%. Analysts and investors recognized this decision as unexpected, questioning not only the independence of the central bank, but also the continuation of the process of reducing inflation.

Such “warm” solutions thrown at the still “hot” economy will definitely not help to cool it down. But are savings “still hot” when inflation shows signs of abating? Yes, because the current decrease in inflation is largely due to the decrease in energy prices and the positive dynamics of food prices at the global level. In other words, the reasons are more likely to be on the supply side, while the role of demand is considered to be still uncertain.

Under these conditions, the heads of the main central banks seem to be skeptical about easing inflation, believing that the most difficult part of the disinflation process is just beginning. Thus, at the beginning of the month, Fed President Jay Powell warned not only that the American central bank will not be in a hurry to lower interest rates, but is also ready to raise them if the situation requires it. At the same time, Christine Lagarde, the head of the ECB, emphasized that it is still too early to consider the fight against inflation won, bringing to the ground those who were waiting for the beginning of a period of interest reduction. rates in the euro zone. Finally, adding to the gallery of skeptical Western governors is Andrew Bailey, governor of the Bank of England, who also said at the beginning of the month that “it is too early to talk about interest rate cuts”, although inflation in the UK is expected to fall sharply in the coming months.

On the same note, BNR Governor Mugur Isarescu also warned earlier this month, referring to the monetary policy interest rate, that “at the moment we can’t even talk about a reduction.” As in the case of the first governors, the fears of his administration are related to the fact that even if it has decreased, inflation is high and “it is not clear that it is going down.” In this sense, his Lordship cited as an example the inflationary impact that changes in fees and taxes will have from 2024.

We are clearly seeing a shift in attitude on the part of central bankers to be more cautious about monetary policy decisions, despite the disinflation process, which 7-10 years ago would probably have forced them to react more quickly. The explanation for the paradigm shift is provided by the Bank of England’s chief economist, Hugh Pill, in an interview with the FT, in which he argues that the unprecedented volatility of global events (pandemic, war in Europe, then in the Middle East) makes it more likely that central banks will to act reactively rather than proactively to economic events.

This is because the economic indicators they use, which are very good at predicting economic cycles, have failed to predict the shocks we have seen in recent years. This makes the response of central banks rather late, requiring a longer waiting period to have an effect and for central banks to be sure that no other unforeseen shocks will occur.

In addition, Europe appears to be facing a tighter labor market, in which higher unemployment does not automatically balance supply and demand. The main reason is related to the difference between the specialties that employers need and those that the available workforce offers. This means that in the race for talent, companies are entering an increasingly competitive salary offer, which will prevent inflation from falling quickly

And in Romania, as long as the stimulation of aggregate demand caused by consumption, as well as investments supported by European funds, is not accompanied by an increase in potential GDP, limited, in fact, by infrastructure, labor force and insufficient capitalization of Romanian companies, inflationary pressure will remain stable, complicating the task of BNR.

The “cold shower” orchestrated by many governors in unison in early November suggests that, despite expectations fueled by falling inflation, interest rates will remain high for longer than business, the public and governments expect.

This development will limit the potential for development through credit, mainly savings, profit reinvestment and PNRR-type development programs, while training and retraining the active population.

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