The European Central Bank will meet tomorrow for its monthly monetary policy meeting, and next week central bank governors in the US, Norway, Sweden and the UK will also discuss what to do with interest rates. “The question you have to ask is how they do it,” says economist Eden Mojajek.
Mojacik explains that one of the things that central bankers worry about when setting the new interest rate is the output ceiling. “They need to estimate how big the difference is between current economic growth and the growth the economy can achieve in a sustainable way, and how big that difference will be in a year or two.”
Estimates
According to the economist, this is not easy at all. “We are already having great difficulty knowing what the economy is doing in each quarter of the current year, let alone what constitutes sustainable growth.” According to him, the percentage of the production ceiling can only be estimated. “It also changes over time, not least because of the decisions made by central bankers themselves.”
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Once you estimate whether the economy is growing too fast or too slow, you must decide what to do with the interest rate. “You put the interest rate you want to set next to the neutral interest rate, which is the interest rate the economy needs to grow properly with stable inflation,” Mojajek says. But the neutral interest rate must also be estimated, and these estimates vary. “The interest rate also changes over time, partly due to central bank policy.”
Not a great record
Banks don’t have great banks Record When making this kind of prediction, however, this is not surprising given the complexity, Mojajek says. “You almost feel sorry for them.” However, according to The Economist, this is certainly not necessary, as central banks are making things unnecessarily complicated for themselves by dealing with “these shiny forecasts and estimates.” “They are a group of people who are responsible for the amount of money we print, and ultimately that is the engine that affects the economy.”
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According to Mojacik, the Fed will “prudently” decide next week to stop raising interest rates for now. The ECB will face a more difficult task tomorrow, because inflation in the Eurozone remains high while the economy is not in good shape. “In light of inflation, interest rates should rise, but not in light of the economy. But with all due respect, the ECB has successfully maneuvered itself to that end.
