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12° Nicosia,
08 February, 2023
 

The ECB's next steps were documented in Limassol

Off the agenda, Central Bankers discussed the crucial issue of inflation and interest rates

Panayiotis Rougalas

The two-day conference of Central Bank Governors in Limassol is a strong contender to serve as the foundation for decisions on monetary policy and inflation strategy to be made in the coming period. Although the Limassol conference did not deal with monetary policy issues and decisions, but rather with more general strategic issues (non-monetary policy meeting), the more than two hours that the bank governors of the eurozone countries were present provided ample time to clarify each banker's position on inflation. It should be emphasized that the ECB Governing Council is under unprecedented pressure from very high inflation as a result of successive crises since 2020.  In contrast to the two-day meeting in Limassol, the Governors have about three hours between meetings in Frankfurt, which are held every two weeks.

Unsurprisingly, it is essentially a presentation of opinions formed prior to meetings, although Limassol provided the chance to alter the "concept." It is understandable that the Governors had space to talk during the two days of the Limassol session because it was not a "clean" conference. The "window" provided by the two days allowed the Governors to continue their discussions after these three hours, but it was impossible to know what was discussed or what the final monetary policy decisions would be.

Given the instability of the European and global economies, the meeting in Limassol can be characterized as significant. According to the two-day agenda, the decisions themselves might not have been crucial, but the meetings between the Governors are still a good predictor of future decisions. The ECB is putting into effect specific policy measures in response to the uncertainty because it has made it clear that it will take the necessary steps to ensure price stability and safeguard financial stability.

However, as was disclosed to Bloomberg on Wednesday, the topic of the Limassol meetings' official agenda was the ECB's "quantitative tightening," or reduction of its balance sheet.

Looking toward the horizon

The investment community is watching the European Central Bank's monetary policy decisions in the coming meetings. The next monetary policy meeting is scheduled for October 27 in Frankfurt, and the final one for 2022 is scheduled for December 15, 2022. Analysts predict that the cycle of European Central Bank rate hikes will continue until early 2023 when they will reach at least 1.25%.

2% is the target

On Tuesday, European Central Bank President Christine Lagarde told a forum of Cypriot university students that she and central banks are working to achieve the 2% inflation target in the medium term. During her first visit to Cyprus in March 2022, the ECB President listed the three main factors that are likely to lead to a higher rise in inflation.

First, she stated that energy prices are expected to remain higher for a longer period of time, and indeed, gas prices have increased by 52% and oil prices by 64% since the beginning of the year.

Second, she stated that food price inflationary pressures are likely to increase.  Russia and Ukraine export nearly 30% of the world's grain, while Belarus and Russia produce roughly one-third of the world's potash, a key ingredient in fertilizer production, exacerbating supply shortages.

Third, Lagarde stated that global manufacturing bottlenecks in certain sectors were likely to persist. She had stated, for example, that Russia is the world's largest exporter of palladium, a key element in the production of catalysts, and that Ukraine has approximately 70% of the world's reserves of neon gas, which is absolutely necessary for semiconductor manufacturing.

A difficult time

The ECB's strongwoman emphasized that Europe is entering a difficult period, with higher inflation and slower growth in the short term. She emphasized that there was significant uncertainty about the magnitude and duration of these events, and that the longer the war lasted, the higher the costs would most likely be.

[This article was translated from its Greek original]

TAGS
Cyprus  |  Limassol  |  Lagarde  |  ECB  |  banks

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