INFLATION & INTEREST RATES - THE TWO CONCERNS THAT THREATEN CYPRUS AND THE EUROZONE - Filenews 5/3 - by Theano Thiopoulou
The domino effect of uncertainty caused by the US-Israeli attack on Iran is being managed by the governments of the Eurozone countries, on two fronts: The possibility of a new energy shock, which could rekindle inflation, at a time when prices had begun to stabilize, but also the management of monetary policy by the European Central Bank.
Simply put, whether citizens will relive days of high prices and a reduction in their real purchasing power and, in addition, whether interest rates and repayment instalments will take the upper hand again.
The broader issues that arise will be of concern to the finance ministers at the meetings of the Eurogroup and Ecofin on March 9 and 10, as well as to the European leaders, at the Summit on the 19th and 20th of the month.
Where is the ECB taking it?
On March 19, all eyes will also be on Frankfurt, as the ECB's governing council, which is closely monitoring developments, will meet. ECB chief economist Philip Lane, in his statements to the Financial Times, noted that "inevitably, the rise in energy prices exerts upward pressure on inflation, especially in the short term" and that such a development would be "negative for growth".
Investors currently see an 88% chance that the ECB will leave interest rates unchanged at 2% this year, according to Reuters. Lane said he sees no reason to change the central bank's stance on interest rates. "I think where we are now is okay." Unless there is a large and lasting shock from the Middle East, the eurozone economy is "growing close to its potential," he said, adding that he did not see significant risks of overheating the economy.
For his part, Yannis Stournaras, governor of the Bank of Greece, points out that the ECB should keep "all options open" in terms of interest rates, as "the effects of the conflict on the economy and inflation will largely depend on its duration". He added, in fact, that in the absence of visibility, the ECB should not rush to change the parameters of monetary policy, but remain vigilant and closely monitor developments.
Vertical decline in Asia
Markets have their own way of pricing risk and discounting situations. According to reports, the stock markets are now pricing in an inflationary shock, although yesterday phenomena of a calmer approach to developments began to be observed.
The European STOXX 600 index recorded a slight rise of about +0.6% on Wednesday, in contrast to two previous sessions with significant losses in equity values.
S&P 500 and Nasdaq futures (before yesterday's Wall Street session) recorded a marginal upward sign (+0.1% to +0.4%), but with much increased volatility.
In contrast, in Asia, the Korean stock index Kospi suffered severe losses, more than 12% yesterday, recording the largest daily drop ever measured. The decline was so pronounced that trading stoppage procedures were triggered to halt trading temporarily due to excessive volatility. The main technology stocks on the Korean stock market, such as Samsung Electronics and SK Hynix, lost double-digit percentages in value.
