Two central banks – one problem: recession may follow inflation

The record inflation rates of the past months have put pressure on the European Central Bank (ECB) and the US Federal Reserve to combat the sharp price increases with a more restrictive monetary policy. Whereas the Fed began its monetary policy turnaround already in March, it was not until the Governing Council meeting of July 2022 that the ECB changed its course. This Focus explains the different pace of the monetary policy measures thus far adopted by the two central banks with the dissimilar economic and labour market developments after the pandemic. As the ECB has taken longer to change its course, the window for comprehensive rate hikes to fight inflation appears to be much smaller because of the impending economic slowdown in the euro area. The ECB is in a difficult position and it appears less clear whether it can steadily pursue its course.

Two central banks – one problem: recession may follow inflation(PDF, 334 KB, accessible)