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Russia's gas shutdown "has a very strong economic impact on the euro area"

Thursday | 14.4.22 | Last Updated 2022-04-14T17:47:39Z

Russia's gas shutdown "has a very strong economic impact on the euro area"

 The monetary policies of Europe and the United States cannot be compared: it's like comparing apples and oranges", ECB president Christine Lagarde said at a press conference in Frankfurt, stressing that Europe "is more open than the united states to war in Ukraine, and will suffer the consequences." the larger one.” Shortly after the intervention, the market reacted, and interest rates rose slightly: the yield on the 10-year German Bund rose from 0.76% to 0.83% (with the spread rising to 165 basis points). now at 2.471% - and French "Oats", at 1.325%. The downside risk to growth prospects, which according to Lagarde " has increased substantially due to the war in Ukraine ", affects investors. 

Risks related to the pandemic have decreased - continued the ECB president - but "war has a stronger effect on economic sentiment, and could further exacerbate supply-side constraints". And then, the conflict that "already weighed on business and consumer confidence, also through the uncertainty it brings, and has created new bottlenecks". Lagarde: "Decision to end ECB net buying in June However, the monetary policy normalization process started in December by the ECB Governing Council appears to be continuing under the banner of gradualness, optionality and flexibility, even in the context of the great uncertainty caused by Russia's Invasion of Ukraine, the Central Bank, in fact, "will decide in the June meeting about the time to end net bond buying", according to Christine Lagarde, who even if "it has not been decided, is still a possibility", this - she explained in a press conference after the Central Bank board meeting - "to ensure that inflation stabilizes at 2%".
"Regarding flexibility, we believe it is useful and effective and it proved two years ago" - added Lagarde - "Now special mention is made of the reinvestment program, and if necessary it will be used". 

It is too early to say when it will be implemented, but flexibility - he added - "is of utmost importance to ensure the transmission of monetary policy throughout the eurozone". However, the long wave of consequent restrictions related to the pandemic that has affected the EU's economic trend is not rosy, meaning that "The euro zone economy grew by 0.3% in the last quarter of 2021: growth is expected to remain weak during the first quarter of 2022 largely due to restrictions." related to the pandemic, and several factors point to slow growth in subsequent periods as well." 

Regarding a solution that appears to be the goal of the European Central Bank board, the president was clear: "Fiscal and monetary policy support remains fundamental, especially in this difficult geopolitical situation". In addition, a series of new pandemic measures in Asia are "contributing to supply chain difficulties". "In the face of rising spreads, the principle we will apply is flexibility (buying bonds, ed): remember - continued Lagarde - that two years ago this was necessary and we are moving quickly: we will do the same, the ECB is ready to make any additional tools needed to have the flexibility we believe we need".
A complete "economic boycott", with an abrupt halt to energy imports from Russia, said the ECB president, "would have a very strong economic impact on the euro area". 

And the upside risk to the inflation outlook "is increasing, especially in the short term, said Christine Lagarde, who explained that the main cause of inflation - which hit 7.5% in March in the Eurozone - "is a rise in energy prices with energy prices 45% higher than last year's level. But the clue at the end of the tunnel is: "Market indicators suggest inflation will remain high in the short term, and then moderate."

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