The EU Commission does not see the risk of inflation as yet banned

Paolo Gentiloni

The EU Commissioner does not yet see the danger of inflation after the lifting of the corona lockdown in China.

(Photo: Bloomberg)

Brussels The latest inflation data has brought some relief in Europe, with inflation falling sharply in several large EU countries due to falling energy prices. In the euro area as a whole, it was 6.9 percent in March – after 8.5 percent in February, as the statistics office Eurostat announced on Friday.

However, the EU Commission does not want to give the all-clear yet. From their point of view, the opening of China after the long Covid lockdown harbors new inflationary risks for Europe.

An economic upswing in China could put commodity markets under pressure again, including the important liquefied natural gas (LNG) market, writes EU Economic Commissioner Paolo Gentiloni in response to a question from FDP MEP Moritz Körner. The letter is available to the Handelsblatt.

“Inflationary pressures in the EU could also increase,” Gentiloni continues. Energy prices have fallen sharply since December 2022, and futures contract prices have so far not indicated renewed tense market conditions.

However, an increase is already being observed in futures contract prices for metals. The reason for this could be that the markets were anticipating an economic revival in China, particularly in the construction sector.

For the time being, the ECB is not holding out the prospect of any further rate hikes

Körner therefore calls on the European Central Bank (ECB) to exercise caution. “The inflationary pressure in Germany has not yet been banned,” said the Liberal. The ECB must keep an eye on the Chinese upswing in its interest rate policy.

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Two weeks ago, the central bank raised the key interest rate by half a percentage point in order to push inflation towards the long-term target of two percent. However, in view of the turmoil in the financial markets, the ECB refrained from holding out the prospect of further interest rate hikes.

She didn’t want to fuel market concerns about interest rate risks in banks’ balance sheets. Since then, there has been a debate among analysts as to whether the central bank will continue to raise interest rates in the future – or whether it will take a break.

Monetary authorities must weigh the two risks against each other. Because core inflation, i.e. inflation excluding energy and food prices, continued to rise in March – from 5.6 to 5.7 percent. The stubborn core inflation is causing “some headaches for central bankers,” said ECB Director Isabel Schnabel recently.

China’s boom brings little growth to Europe

A look at China further clouds the picture. The Commission can hardly see any growth stimulus from the Chinese upswing for the European economy. The positive effects are “limited”, writes Gentiloni.

The reason: The Covid lockdown mainly affected the contact-intensive sectors in China. The opening of these is now primarily leading to an increase in domestic demand, less in foreign demand.

Körner asked the Commission whether it could quantify the effects of a Chinese upturn on economic development and energy prices in Europe in 2023 and 2024.

More: Inflation rate in the euro area falls more sharply than expected – but core inflation is picking up

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