University of Cyprus economics professor Marios Zachariadis on Tuesday said that tackling inflation requires an immediate and drastic increase in interest rates combined with targeted fiscal measures that will not inadvertently fuel inflation further.

In an interview with the Cyprus News Agency (CNA), Zachariadis explained that the causes of inflation have been predominantly but not exclusively external.

Moreover, he noted that any policies that may be implemented should not exacerbate existing inflationary pressures, something which could make things worse than in other European economies.

“We have a common monetary policy with the other Eurozone countries and we also have similar pressures on petroleum products,” Zachariadis said.

“What differs from country to country is fiscal policy, so the various expansionary expenditures, including changes to taxation, can lead to higher inflation in one country than in the rest of the Eurozone,” he added.

Regarding the measures that the government should be implementing, the professor said that these should be targeted and tailored to the most vulnerable social classes.

Moreover, he stated that increased government expenditure should be avoided, including through the use of tax cuts, because such measures may adversely affect demand.

“Of course, the vulnerable groups of the population, the poorest people, must be protected, so targeted measures are right to be taken, similar to some of those already announced,” he said.

“There reason for this is because these groups are so low-income they can not reduce demand or consumption further,” he added.

Zachariadis also urged people to reduce their personal fuel and energy consumption as much as they can afford to do so on a personal level.

Regarding the possible implementation of flat measures, meaning any policies that would affect everyone equally, Zachariadis said that these would ultimately push inflation higher and further hurt the most vulnerable.

“It is not just a matter of budgeting to take sweeping measures, which would increase government spending or reduce taxes, as this could lead to higher inflation in one Eurozone country than another, reducing its competitiveness, which could lead to a recession,” he said.

“Sweeping policies can be damaging and must be avoided in favour of targeted measures in order to maintain some purchasing power for those most in need,” he added.

Zachariadis pointed out that raising interest rates at the Eurozone level is a necessary part of the solution to tackling inflation, for two key reasons.

Firstly, he explained that when interest rates rise, demand is suppressed. Raising them and keeping them high for a prolonged period of time would help contain excess demand.

The second reason Zachariadis mentioned the need to contain the fall of the euro against the dollar.

The euro has fallen by 15 per cent this year. While it has recovered some of its value during May, it still finds itself 12 per cent lower against the dollar than in the past.

“Having a devaluation of the euro, because interest rates are lower and are expected to be lower, with their correction being slower than the US interest rate correction, implies a devaluation of the currency, which fuels inflation,” Zachariadis said.

“For example, oil is priced in dollars, so if the euro depreciates against the dollar, oil becomes even more expensive,” he added.

Asked whether the increase in interest rates is coming to stay or whether it is a temporary measure to deal with inflationary trends, Zachariadis said that it’s the other way around, with the negative interest rates seen in recent years being the exception.

“Positive interest rates, or even higher than those we have had historically, will be needed to contain inflation”, Zachariadis concluded.