Increasing rates of inflation: Should the ECB raise interest rates?

Inflation rates have been increasing strongly worldwide. As a reaction, the European Central Bank (ECB) raised its key lending rates at the beginning of July. Jörg Krämer, Commerzbank, regards this rate hike as necessary, since the decisive, long-term inflation expectations increased during the course of the year and were clearly above the ECB's 2 percent target level. The ECB should only lower its key rates after a clear fall in the long-term inflation expectations and in accord with its own definition of price stability. Ulrich Kater, DekaBank, interprets the actions of the ECB as the attempt to influence inflation expectations and not as a change of course in the direction of a more restrictive monetary policy. Seen this way, the ECB's action in July can be justified. Also Werner Becker, Deutsche Bank Research, is of the opinion that "the moderate rise in interest rates in July is a psychologically important signal for the stabilisation of inflation expectations". He adds that "a small hike in key rates will not cause major damage to economic activity". This view is contradicted by Sebastian Dullien, University of Applied Sciences (FHTW), Berlin: "At first glance this reaction may seem reasonable in light of the strong rise in prices, but with a closer look there is very little to justify this step. There are many indications that the already begun economic downturn would have been sufficient in itself, even without the ECB interest rate hike, to limit the risks of inflation. Instead of prudently holding inflation at bay, the danger is that the ECB course will turn the downswing in the euro area into a full-grown, deep recession."