'Supply chain bottlenecks and rising energy prices' are main threat to recovery, warns Lagarde

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'Supply chain bottlenecks and rising energy prices' are main threat to recovery, warns Lagarde
© DPA PA Images European Central Bank HQ in Frankfurt

THE EUROPEAN CENTRAL Bank (ECB) has decided to keep its pandemic stimulus efforts unchanged even as consumer prices spike and central banks in other parts of the world look to dial back support as their economies bounce back from the worst of the Covid-19 outbreak.

Today’s decision affects Ireland and the other 18 European Union countries that use the euro currency. It also sets up a debate in December about whether and how to end the €1.85 trillion euro stimulus tool, the Pandemic Emergency Purchase Programme (PEPP).

It means that the Irish government should be able to continue borrowing at ultra-low rates of interest for the foreseeable. The ECB’s stimulus efforts have helped to keep down borrowing costs for euro area member countries during the Covid-19 crisis.

The PEPP is slated to run at least through March 2022 — or until the bank deems the crisis phase of the pandemic over.

But recently higher inflation has sharpened questions about whether the exit should come sooner rather than later.

Annual inflation in the group of countries using the euro hit 3.4% in September, the highest since 2008. 

Central banks usually raise rates and dial back stimulus efforts to combat rising prices.

But the European Central Bank said today that it foresees inflation falling to 1.5% by 2023, well below its goal of 2%.

Speaking at a press conference following today’s meeting, European Central Bank President Christine Lagarde said the Eurozone is still recovering strongly from the pandemic.

However, she added that the momentum had “moderated” in the three months to the end of September amid supply bottlenecks, which she said are “holding back” manufacturing businesses in particular.

Lagarde said these constraints are “clouding the outlook” for the coming months.

“The near-term supply bottlenecks and rising energy prices are the main risks to the pace of recovery and the outlook for inflation,” Lagarde said.

If supply shortages and higher energy prices last longer, this could slow down the recovery. At the same time, if persistent bottlenecks feed through into higher than anticipated wage rises, or the economy returns more quickly to full capacity, price pressures could become stronger.

“The grip of the pandemic on the economy has visibly weakened with restrictions being lifted as a result of successful health measures and large numbers of people now vaccinated,” Lagarde added.

“But higher energy prices may reduce purchasing power in the months to come.” 

Overall inflation is being driven by three main factors, she said, all of which are expected “to ease in the course of 2022 or to fall out of the year on your inflation calculation”.

Firstly, rising household and wholesale energy prices were responsible for almost half of Eurozone inflation this year, Lagarde explained.

“Prices are also going up because recovering demand related to the reopening of the economy is outpacing supply,” she said.

“Finally, base effects related to the end of the VAT cut in Germany. are still contributing to higher inflation… We expect these factors to ease in the course of next year. We continue to foresee inflation in the medium term remaining below our 2% target.”

The Bank of Canada decided on Wednesday to halt its bond purchase programme, while the central bank of Brazil raised interest rates for the sixth straight meeting Wednesday and indicated rates would continue going up.

The US Federal Reserve has indicated it could announce a reduction in the pace of its monthly bond purchases as soon as November, though interest rate increases would be “premature”, according to chairman Jerome Powell.

The Bank of England has signalled it is getting ready to raise rates to combat inflation.

Reporting by Ian Curran

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