The dynamics (inflation – ed.) – nearly 2 percentage points more – clearly shows that these externalities are crucial. We will not act on it with interest rates. In this context, be aware that it may be a battle against windmills at a later stage – says the professor. Zbigniew Krysiak, economist and head of the Schumann Institute of thought, asked about the reasons for high inflation.
According to the Central Bureau of Statistics, the prices of consumer goods and services in June 2022 increased by 15.6 percent year on year, and compared to the previous month, prices increased by 1.5 percent.
Commentary on the inflationary situation was made by Prof. Zbigniew Krysiak, economist and president of the Schumann Institute of Thought.
There is a significant increase of about two percentage points. In my opinion, this shows that raising interest rates does not work. You just have to stop raising interest rates because it calms the economy. Some analysts estimate that raising interest rates by one unit reduces inflation by 0.2%, but reduces GDP by 0.4%. So, in a sense, increases in interest rates calm the economy much more
– says the professor. Krysiak.
The dynamics (inflation – ed.) – nearly 2 percentage points more – clearly shows that these externalities are crucial. We will not act on it with interest rates. In this context, you have to realize that it could be a fight against windmills. We also see that in the West they generally do not raise interest rates and that inflation is rising. They may realize that the interest rate instrument is limited in scope. It can only affect the imbalance between supply and demand
– He adds.
How do we fight high inflation?
Our interlocutor emphasizes that “here we are dealing with a large number of inflationary factors.”
These externalities (by raising interest rates – ed.) will only harm the economy. The worst thing that could happen is to cool the economy down to zero, or even in such a way that the pace of GDP is completely negative. And then it leads to increased unemployment, and unemployed borrowers will not be able to repay their loans, so companies will also incur high costs for loans, making people redundant. Such a cycle will arise – if the borrowers cannot repay, the banks will have no income, and they will have to carry out enforcement, and this leads to significant costs
– says the economist.
Therefore, in this context, it is necessary to turn off this instrument – the increase in interest rates – and only consider the use of another instrument, which is an increase in the required reserve ratio.
– He adds.
a. Krysiak states that the required reserve ratio is currently 3.5%. At the same time, he explains what this tool is.
If it is now 3.5%, then this means that for every PLN 100, the bank sets aside PLN 3.5 for the reserve, that is, it cannot allow these funds to be loaned out. So the money supply is decreasing. And when it goes down, there is a chance (without raising interest rates) that the terms of repayment and access to loans will be stable. An increase in the reserve requirement ratio will be a cost to banks – it will reduce their profits – but it will maintain a stable income base on the part of customers
Today, when commenting on this situation, it should be related to thinking about what needs to be done so as not to simply freeze the economy. And the freeze is a minus, not an increase in GDP, but a decrease. At the same time, let us remember that several months ago there were comments from various experts that the level of 4.5 – 5 percent interest rate, which is the maximum that does not threaten to slow down the pace of economic development. Today we have more than 5%, and at the same time please note that the dynamics of inflation have gone even further. Hence, this tool is no longer working
– Adds the head of the Schumann Institute of Thought.
When is the peak of inflation?
Before every rise in inflation or increase in interest rates, it has been said that we “expect a peak and stable inflation”. We remember that many said that this flattening would happen at the August/September level. Previously, some spoke in June/July, but most were referred to as July/August. And what do we see today? It’s the end of June, and we can see that inflation has gone up even more
Professor’s notes. Krysiak.
As we see the reaction of the economists, everyone is surprised. No one expected there to be such an increase. Please note that many bank economists and economists have a wealth of information and data. But the models used failed
– He adds.
I am not surprised (with increased inflation – editor). We must conclude that these analytical models fail. They are good in normal times. So, I would really encourage you to cool off thinking that inflation will peak at the end of the third quarter or the end of the year.
– confirms the economist.
Our interviewer also predicts that year-on-year inflation may even rise to the level of 18-20%.
While it was hard to believe a few months ago, it is now. Certainly, inflation will not slow down neither in July nor in August. These dynamics may be smaller, of course, but we don’t count on the fact that after the July reading it will be, say, 14 percent.
– says the professor. Krysiak.
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