The ECB raised its key interest rate to 2.5% in September in an effort to control inflationary pressures and avoid secondary price increases through wages. With average harmonized inflation in the eurozone at 3.2% in August and the ECB seeing it at 3% and above for the whole of 2026, the ECB theoretically has greater room to raise its key interest rate even further.However, the traditional reasoning behind interest rate increases is the compression of excess demand. The latter leads to lower prices and a slowdown in the growth rate.
However, theory says one thing and practice another. And this is because the eurozone economy is growing at anemic rates and no internal excess demand is identified except in a few countries such as Greece. Inflation is mainly imported and is linked to the surge in energy costs due to geopolitical tensions in the Middle East and elsewhere.
The critics of the ECB's policy that leads to an increase in intervention rates claim that the latter will not reduce the price of oil and natural gas but will hurt the economies of the member states. For them, the ECB's policy is problematic.
As is logical, the ECB has a different view on the matter. This is because it places particular weight on the stabilization of inflationary expectations and the absence of secondary effects through excessive wage increases. At the same time, it wants to discourage expansionary fiscal policies as interest rate increases raise borrowing costs for covering deficits.
The problem of the US is different. There, the Fed is gradually raising the intervention rate to compress inflation, which stood at 3.4% in August, bearing in mind the lesson of the 1970s. The then Fed chairman, Arthur Burns, stopped raising interest rates so as not to cause a recession before inflationary expectations had stabilized, with the result that credibility was lost and the US entered a spiral of price and wage increases.
In the US, the main problem is excess domestic demand and to a lesser extent imported fuel inflation. However, there are different approaches here too. According to Bill Ackman of Pershing Square, high interest rates are not going to discourage the trend toward greater investment in AI, which promises impressive returns on equity.
On the contrary, high interest rates will hurt traditional sectors of the economy, bringing the American economy closer to recession. Moreover, they may fuel inflation as technology companies pass the increased borrowing cost on to their customers, while governments pay more in interest, widening fiscal deficits that favor the persistence of inflation.
Therefore, the increase in interest rates by the ECB and the Fed may fail to produce the desired results—a fall in inflation without recession. Even worse, it could fuel inflation as Ackman claims. This is the “Suicide” in the title of the article.