October 2, 2022

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An ECB official believes that only an economic recession in the euro zone would stop the price increases

A slowdown in the economy or even a recession in the euro area could ease inflationary pressures, said Fabio Panetta, a member of the ECB’s Executive Board. In other words, only an economic recession would stop the price increases.

European Central Bank officials should consider the risk of a downturn in the eurozone economy and the impact on prices when considering future monetary policy measures, said Fabio Panetta, a member of the ECB’s Executive Committee, reports Bloomberg.

“If there is a significant slowdown in the economy, or even a recession, these developments would alleviate inflationary pressures,” Panetta said.

He explained that any monetary policy adjustment “must be carried out strictly according to the available data, taking into account the conditions in the euro zone economy. This implies, first of all, that the probability of a recession in the euro zone is increasing, from the cause of the consequences of the pandemic, of the shock in the prices of raw materials in recent months, following the war and its consequences for trade, and the uncertainties”.

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At its July 21 meeting, the European Central Bank raised interest rates for the first time in 11 years, indicating that further increases could follow in 2022, and announced a new bond-buying program to keep costs under control. loan of the most indebted countries in the euro area.

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The ECB’s Governing Council decided to raise the interest rate on the deposit facility by 50 basis points, to zero, from minus 0.50%, in an effort to reduce the record level of inflation in the euro area.

Also, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility were increased by 50 basis points, to the levels of 0.50% and 0.75%, respectively.

The economic outlook worsened after Russia cut natural gas supplies to Europe and rising prices hurt demand.

Economic activity in the euro zone contracted in August for a second straight month as higher prices forced consumers to cut back on spending, while supply chain disruptions hurt factory activity, preliminary data from S&P Global showed on Tuesday. and the trend could continue.

The price of gas in Europe, 7 times higher than last year

“We have to consider very carefully the dynamics of raw material prices. The latest dynamics suggest that in fact the prices of raw materials are decreasing, except for gas. We know that gas prices are influenced by other factors, by geopolitical factors”, he Panetta said.

In Europe, natural gas prices are almost seven times higher than at the same time last year. In recent weeks, the market has tightened further as extremely hot and dry weather has disrupted fuel transport on rivers and limited hydro and nuclear power production. As a result, demand for gas is increasing at a time when supplies from Russia are decreasing.

Regarding the monetary policy, “adjustments are possible, but the latest developments in the economy should induce us to exercise one of the main virtues of central bankers, namely prudence”, warned Panetta.

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