The last time Germany’s inflation reached its current high level was in June 1992, when the Bundesbank’s benchmark lending rate Lombard was 9.75%Today, the European Central Bank, the successor of the Bundesbank, is charging German banks and the broader euro system zilch.

Since the summer of 1992, the situation has changed a lot. 29 years ago, a unified German country was still in its infancy, and a currency union had not yet been born. According to a report released by the research institute Laburnum Consulting on Tuesday, the latter of these two changes can better explain why the interest rate gap between then and now is so huge.

As we enter 2022, the European Central Bank is breaking another tradition. For the first time in more than a decade, policymakers in Frankfurt are formulating a different course from the Fed and the Bank of England. Each of them will either raise interest rates or plan to consider raising interest rates in the next few months in response to the past. The inflation that has been witnessed in the past year has soared.At the same time, the European Central Bank is Will keep interest rates unchanged During this year. Calendula notes — Written by John Nugée, founder of Laburnum and former Bank of England official, and economist Gabriel Stein — believes this is partly because the currency guardians of the euro zone are making policies that take into account the region’s heavily indebted sovereign states:

Why is the European Central Bank so reluctant to take action? We think the answer may be the fear that the political consequences of trying to actively reduce inflation may outweigh the economic consequences of continued inaction. Behind this, we feel that the European Central Bank itself has undergone a fundamental change…

One of the main features of the pandemic is the surge in EA government debt, especially (but not exclusively) in Southern Europe. According to “The Telegraph”, France’s debt/GDP ratio is currently 118%; Spain is 120%; Portugal is 135%. What’s more worrying is that Italy is 155%, while Greece’s debt/GDP ratio, after repeated restructuring and write-offs, is 206%!

These are shocking figures. What worries the European Central Bank is the comparison with Northern Europe. The most notable thing is that Germany’s debt as a proportion of GDP only increased by 4 percentage points during the same period, from 65% to 69%.

Therefore, the European Central Bank is basically trying to provide a monetary policy for two very different economies, one is an economy with heavy debt, and the other is an economy with less debt.

Nugée and Stein believe that this will cause the European Central Bank to be criticized again, and in the German mass media, because they prefer the more profligate members of the euro zone at the expense of the more stingy members.

We agree that this narrative is likely to happen. And over time, the European Central Bank seems unwilling to withdraw support for reasons that cannot be explained by economic factors alone.

Although workers here have not experienced wage increases like their American counterparts, signs of a tight labor market are becoming more apparent. This is a graph from an email from Economist Nomura that piqued our interest when it appeared in our inbox in mid-December:

However, even though the European Central Bank is an outsider in terms of plans for the coming year, compared with previous generations of policymakers, there may still be much more in common among central banks.

Although the Fed’s wording has changed, the huge gap between the US and Germany’s interest rates now and then is similar. The last time the inflation rate in the United States exceeded 6% was in the fall of 1990, and the effective federal funds rate was about 8%. Today it is hovering above zero.

There is a gap between the current level of interest rates and the last time we saw the inflation rate is so high.

They don’t need to be as tall today as they were in the early 1990s, and that’s for good reason. For example, governments, businesses, and households are now heavily indebted—a relatively small rise in interest rates will have a greater impact on behavior than in the past. This time price pressure may also be another beast. Some of the inflation we have seen recently is in the commodity market such as used cars. This inflation is related to pandemic-related supply shortages, and as companies adapt to the Covid-19 world, this inflation is likely to disappear.

Nevertheless, a question still exists in the extent to which radical fiscal expenditures and monetary easing policies have caused inflation to continue, and not just cracks in the global supply chain can justify this. Interest rates do not need to rise to 10%.But if (and—in our opinion—it’s still a big if), higher inflation rates become common, then they will need to be much higher than any monetary policy maker would admit.