ECB move to temper energy costs would push up unemployment

By Admin On Apr 5, 2022 20

[ad_1]

ECB move to temper energy costs would push up unemployment - DIW think tank

FRANKFURT (Reuters) – The European Central Bank could cut households’ fuel bill by raising interest rates but that would weigh on industrial output and boost unemployment, the German Institute for Economic Research or DIW, said in a research note on Wednesday.

With inflation at a record high 7.5%, the ECB is under increasing pressure to tighten policy, even if rapid price growth is mostly due to soaring oil and gas prices, which are largely outside the bank’s control.

But a rate hike would strengthen the euro, so the effective cost of energy would fall since these commodities are mostly denominated in dollars.

“Time series models for Germany show that an interest rate increase would decrease headline inflation by 0.2% and heating and fuel prices by up to 4%,” DIW, an influential think tank, said.

“At the same time, an interest rate increase would derail industrial production and increase unemployment during an already slow economic recovery,” it added.

Although conservative policymakers, including the central bank chief of Germany, are pushing the ECB to put a rate hike on the agenda, the bank has made no commitment on rates, arguing that the war in Ukraine has created exceptional uncertainty.

Still, around 60 basis points of rates hikes are now priced in by markets over the course of this year, with investors expecting the minus 0.5% deposit rate back in positive territory for the first time in a decade.

The move is still likely to be a dilemma for the ECB given the difficult tradeoffs, DIW argued.

“If it decreases inflation, it will also stall economic recovery. Nevertheless, it is crucial that the ECB fulfils its responsibilities and credibly conveys that it will take the necessary action.”

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

[ad_2]
Source link