Ukraine: Expert discusses ‘big split’ between US and Europe
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Statistics body Eurostat today confirmed inflation had swollen to 5.1 percent in January, continuing the sustained rise of recent months. Soaring energy prices have remained the biggest driver among the different components with energy inflation reaching 28.8 percent in January, up from 25.9 percent in December. Inflation also climbed for food, alcohol and tobacco, reaching 3.5 percent. Melanie Debono, Senior Europe Economist at Pantheon Macroeconomics, said tensions in Ukraine were now “a wildcard for energy inflation.”
The uncertain outlook is particularly problematic for the European Central Bank (ECB) who have so far held on to the belief inflation would be temporary and begin to subside in early 2022.
Alex Livingstone, Head of Trading for FX and ETFs at Titan Asset Management, explained: “The now murkier socio-economic backdrop of Germany’s recent decision to impose sanctions on the Nordstream 2 gas pipeline may bolster inflationary pressure on the area.
“This should give ECB hawks further ammunition to hike rates in order to halt escalating inflation, providing the escalation of tensions in Ukraine will not weather European growth prospects.”
Russia currently supplies around 40 percent of Europe’s gas consumption at a time gas prices have already been severely strained.
Despite halting approval of the Nord Stream 2 pipeline Germany is currently in a difficult economic position with warnings of a possible recession as well as rising inflation.
This week German central bank the Bundesbank warned that Germany faced its economy shrinking for another straight quarter with output likely to “decline again noticeably.”
President of the Bundesbank Joachim Nagel has expressed particular concern over inflation and the ECB’s apparent reluctance to act by raising interest rates.
Recently he told German paper Die Zeit “we have reached a textbook case for central bank action.”
For much of the period of rising inflation the ECB has resisted any major tightening of policy with President Christine Lagarde frequently ruling out a rate hike before 2023.
Recently the tune has changed slightly though with greater acknowledgement of inflation being likely to persist longer than forecast.
While countries such as Germany are largely pushing for a tougher line the ECB has found itself torn though due to concerns about debt levels elsewhere in the bloc.
Shane O’Neill, Head of Interest Rate Trading for Valdius Risk Management, explained “In Italy, Greece and others debt-to-GDP ratios are still comfortably in triple digits.
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“A sudden increase in funding costs will have crippling effects on these economies and, most worryingly, could re-spark calls to leave the EU altogether.”
According to Mr O’Neill Italy’s high debt burden singles it out as one of the biggest areas of concern if tighter monetary policy makes it more expensive for Italy to raise money through bonds.
“A sudden jump in financing costs that diverts money away from the people, can be used by those looking to run an anti-EU campaign” he explained, adding “we are only a few percentage points from the European question being firmly back on the table.”
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