European Central Bank looking through the eye of the energy supply storm

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“In July, we decided on a 50 basis point hike in light of the inflation outlook. At the moment, I do not think that this perspective has fundamentally changed”, – Isabel Schnabel, Member of the Executive Board of the ECB.

Image © European Union – European Parliament, reproduced under CC licence.

The European Central Bank could stay on its current course of hawkish interest rates even as the common currency economic zone enters the eye of an energy supply storm this winter if Isabel Schnabel’s latest remarks, member of the executive board and political head of the ECB, are something to do by.

European policymakers may have crossed a rubicon in July when they voted to raise all key ECB interest rates by 50 basis points in a policy move that officially ended a half-decade of interest rates negative on the continent.

This has become more likely with influential members of the Governing Council signaling since then that further interest rate hikes by the ECB remain likely even as market concerns about the European economic outlook have increased further in the weeks since followed the July meeting.

One of the latest policymakers to do just that was Isabel Schnabel during an interview with Reuters this week.

“We have learned that the economy is able to adapt. But the energy price shock is too big to be fully offset,” she told Reuters’ Balazs Koranyi and Frank Siebelt.

“I don’t see any indication of a deep and prolonged recession at the moment. It’s not even clear that there will be a technical recession in the Eurozone. I just wouldn’t rule it out,” he said. -she adds.

As natural gas prices in Europe remain near record highs and water levels drop on major shipping routes like the Rhine in Germany, complicating efforts to fill energy reserves at weather for the winter, worries about the European economic outlook have increased palpably lately.

Those concerns were somewhat justified when Eurostat figures revealed earlier this week that European economies grew overall by 0.6% in the second quarter, a little slower than the 0.7% consensus forecast. among economists, but faster than the UK and US economies.

“Our monetary policy decisions are guided by the outlook for inflation. We are currently seeing very high rates of inflation. Our last projected inflation figures were also quite high and the factors causing inflation are not going away. not anytime soon,” Schnabel said Tuesday.

Europe’s economic outlook has darkened alongside the outlook for other economies as a summer season approaches which has brought heightened risks to energy supplies and crops, but has not deterred the ECB from focus on reducing runaway inflation rates.

This is partly because these risks to energy supplies and crops are also upside risks to euro area inflation rates which would prove more difficult for the ECB to manage if Continental economies were weathering the current energy supply storm better than expected.

“Any decision will be made based on the incoming data. If I look at the most recent data, I would say that the concerns we had in July have not diminished. In September we will have an assessment of all available data and we will have new personnel projections,” Schnabel said.

“In July, we decided on a 50 basis point hike in light of the inflation outlook. At the moment, I don’t think that perspective has fundamentally changed,” she added.

The full transcript of the interview can be accessed here.

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