“Europe is entering a difficult phase. In the short term, we will face higher inflation and lower growth,” said ECB President Christine Lagarde this morning, referring to the fallout from the war in Ukraine, speaking at a conference organized by the Central Bank of Cyprus. Not only. “There is considerable uncertainty about how large these effects will be and how long they will last, the longer the war lasts the more likely the costs are,” she said.
Lagarde reiterated that the economic impact of the war and sanctions against Russia should be considered in what economists call “a supply shock”, which simultaneously drives up inflation and reduces growth. According to the president of the ECB, there are three major factors that will push the cost of living upwards. First, energy prices will be high for longer, with gas prices going up by 52% since the beginning of the year and oil prices by 64%. Second, pressures on food inflation are likely to increase, given the importance of the two countries involved on several key supplies, such as wheat and corn, but also fertilizers. Third, bottlenecks in global supply chains are likely to persist in some sectors.
“At the same time, war poses significant risks to growth,” he continued. Europe is a net importer of energy and rising prices mean a loss of purchasing power for households. As if that were not enough, the conflict has already begun to reduce the climate of confidence through two channels, on the one hand it makes families more pessimistic and could reduce their consumption costs. On the other hand, it affects business investments. “Clearly the harder the war”, Lagarde summed up, “the higher the costs, the greater the probability that it will end up in more adverse scenarios”.
In this adverse context, “optionality, graduality and flexibility” remain the watchwords for the conduct of the monetary policy of the ECB, which remains committed to taking “whatever action is necessary to pursue price stability and safeguard financial stability”. And the best way in which monetary policy can intervene and first and foremost with optionality: “it means that we are prepared to react to a wide range of scenarios and that, of course, this will depend on the development of the quotation marks,” he clarified. Therefore, you confirmed that if the data confirms the prospect of inflation that will not weaken in the medium term, in the third quarter the ECB will put an end to net purchases of securities. In an opposite scenario,
Instead, “gradualism means that we will move cautiously and adjust our policy to the extent that we receive feedback on our actions. Any adjustment to ECB rates will take place some time after the end of net purchases with the App program and will be gradual. “, explained the number one of the ECB. Finally, flexibility: “it means that we will use all our armaments to ensure that monetary policy is transmitted to all parts of the euro area,” she concluded. All elements that confirm the approach given to monetary policy by the last Governing Council with this unknown about how much this “some time” after, the stop to net bond purchases, in which an initial
rate hike will take place of interest.
ECB board member Robert Holzmann was the first to explicitly support market expectations for a 50 basis point hike in deposit rates by December. “The ECB should raise the key interest rate to zero by the end of the year otherwise it risks having to raise it more sharply next year to keep inflation at bay,” he said yesterday in an interview with the German newspaper, Boersen-Zeitung. the governor of the Austrian Central Bank. “A hike in deposit rates to zero by the end of the year would be important for monetary policy as it would increase optionality,” explained the hawk Holzmann.
The Russian invasion of Ukraine today led the Austrian Central Bank to cut its growth forecasts and drastically increase its inflation prospects for this year. The Austrian National Bank (ONB) has reduced its gross domestic product growth forecast for this year to 3.5% from the 4.3% forecast in the half-year economic outlook released in December. And it raised its inflation forecast to 5.3% from 3.2%. “Looking ahead, the economy will be strongly driven by this war and its impact,” said Holzmann today. The growth forecasts for next year have also been cut from 2.6% to 2.2%.
New forecasts which, moreover, are based “on the hypothesis of a timely end of the war. Alternative scenarios, assuming prolonged and growing hostilities and extended sanctions and reflecting a reduction in gas supplies from Russia produce much higher effects on production and inflation “added the Austrian Central Bank. In the worst case, inflation would rise to 9% this year and growth would shrink to 0.4%. In the less severe one, growth would slow to 1.9% and inflation would rise to 7.6%. In the main scenario showing 3.5% growth this year, the impact of the war represented about half of the 0.8 percentage point cut to growth forecast and about a quarter of the 2.1 point increase. to inflation forecasts.
Meanwhile, the war in Ukraine brought down eurozone economic sentiment in March. The European Commission’s economic sentiment index for the 19 euro area countries dropped to 108.5 points in March from 113.9 in February, a figure revised downwards. Economists had estimated a contraction of 109 points. Consumer confidence also collapsed to -18.7 in March from -8.8 in February, while sentiment in the manufacturing sector dropped to 10.4 from 14.1. Confidence in the retail sector also hurt, at 0.2 in March from 5.5 in February. Only the service sector rose to 14.4 points from 12.9. Additionally, expectations for selling prices in the manufacturing sector have jumped to an all-time high since the start of the series in 2000, to 58.1 in March from 49.8 in February. Consumer expectations on
Pending German inflation in March, March ADP data and the final reading of US fourth quarter GDP in the early afternoon, the 10-year US Treasury yield rises to 2.407% after peaking at 2.5% in recent days which raises concerns about a recession in the American economy and that of the BTP at 2.168% with the BTP / Bund spread at 149.70 basis points. This morning the Italian Treasury placed 3 billion euros of BTP 2027 at a yield of 1.46% and 3.5 billion euros of BTP 2032 at 2.14%. (All rights reserved)

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