Will the European Central Bank (ECB) choose the worst solution? It is not to implement a real anti-inflation policy nor is it to give up the fight against inflation. It is to choose an intermediate solution, analysts at Natixis report.

The ECB is likely to choose an intermediate solution

“The ECB: Cannot raise interest rates to the level needed to bring inflation back to 2% in a decent timeframe since this level of interest rates would be very high (more than 5%), and would jeopardise public debt sustainability, particularly in low-growth countries with high-interest rates (Italy, Greece); Cannot refrain from fighting inflation because of its 2% inflation target.”

“The ECB will probably choose an intermediate monetary policy. But this compromise solution is the worst of all: the interest rate would not be high enough to significantly reduce inflation, but would be high enough to give rise to a solvency problem for countries with zero potential growth, Italy in particular.”