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The European Central Bank’s interest rate hike exposes concerns about Italy as the weakest link in the eurozone

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Economists say Italy is the eurozone country most vulnerable to a debt crisis as the European Central Bank raises interest rates and buys fewer bonds in the coming months.

Select nine out of 10 economists in a poll conducted by the Financial Times Italia As the eurozone country “most at risk of uncorrelated selling in government bond markets”.

Italy’s right-wing coalition government, which took power in October under the prime minister Georgia Meloni, trying to follow the path of financial rectitude. The budget was earmarked for the country’s fiscal deficit to drop from 5.6 percent of GDP in 2022 to 4.5 percent in 2023 and 3 percent the following year.

But Italy’s public debt remains among the highest in Europe at just over 145 percent of GDP. Marco Valli, chief economist at Italy’s UniCredit bank, said the country’s “high debt refinancing needs” and the “potentially tricky” political situation made it more vulnerable to a sell-off in bond markets.

Borrowing costs in Rome have risen sharply since the European Central Bank began raising interest rates last summer. The 10-year yield rose above 4.6 percent last week, nearly four times the level it was a year ago and 2.1 percentage points above the equivalent yield on German bunds.

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Meloni expressed her dismay at the European Central Bank’s willingness to continue raising interest rates despite the risks to growth and financial stability. It would help if the ECB handled its communication well. . . “Otherwise, it risks generating not panic but volatility in the market that negates the efforts of governments,” she said at a news conference last week.

Veronika Roharova, head of eurozone economics at Swiss bank Credit Suisse, said the new Italian government “has given investors few reasons to worry at the moment.” But concerns could resurface as growth slows and interest rates rise more and more [debt] The release is picking up again,” she added.

The ECB’s interest rate setters have insisted they will continue to raise interest rates in half-point increments through the first months of this year. Klas Nott, governor of the Dutch central bank and a hawk on the governing council, told the Financial Times that the central bank had been fair. Start The “second half” of the price increase cycle.

However, analysts believe that the ECB is overestimating inflation risks – and underestimating the likelihood of a recession. Managing Director of the International Monetary Fund, Kristalina Georgieva He said At the end of the week, half of the European Union will be in recession this year. Four-fifths of the 37 economists polled by the Financial Times in December had their forecasts European Central Bank It will stop raising prices in the first six months of 2023 and two-thirds expect it will start lowering prices the following year in response to weak growth.

The vertical graph of the FT poll results (% of responses) shows when will the ECB stop raising interest rates?

On average, they predicted that the ECB’s deposit rate would peak at just under 3 percent, below the level investors are betting on as evidenced by interest rate swaps.

A separate Financial Times poll of more than 100 senior UK-based economists found this Britain will endure one of the worst recessions And the weakest recoveries in the Group of Seven in 2023.

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Central banks were all over the world raise rates sharply to tackle inflation, which has risen to multi-decade highs in many countries, as energy and food prices soared after Russia’s invasion of Ukraine and the end of the coronavirus pandemic shutdowns increased demand for goods and services.

The European Central Bank has been slower than many Western central banks to start raising interest rates, but since last summer it has tightened policy at an unprecedented pace, raising the deposit rate from 0.5 percent to 2 percent in six months.

The vertical graph of the FT poll results (% of responses) shows when will the ECB cut interest rates?

The European Central Bank has been very slow [in] “The realization that inflation was not temporary, but is now rapidly advancing,” said Jesper Ranjved, professor of finance at Copenhagen Business School. “I still fear, though, that the ECB will not tighten enough because of the problems this could cause in Italy.”

The European Central Bank is set to start shrank Its €5tn bond portfolio increased by €15bn per month from March through partial replacement of outstanding securities, adding upward pressure on Italy’s borrowing costs. Ludovic Soprane, chief economist at German insurance company Allianz, said the eurozone risks a repeat of the 2012 bond market crash “because fiscal capacities vary across countries without the ECB’s heavy lifting”.

Italian government ministers criticized the European Central Bank for its strong monetary tightening. Defense Minister Guido Crocito wrote on Twitter that the ECB’s policies “make no sense” while Deputy Prime Minister Matteo Salvini said higher rates would “burn billions in Italian savings”.

“Italy’s high stock of debt, the high fiscal deficit and the need for additional energy support measures . . . is making the markets very anxious,” said Silvia Ardagna, chief European economist at Britain’s Barclays Bank.

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The European Central Bank unveiled a new bond-buying scheme, known as the Transfer Protection Instrument, which is designed to tackle unjustified rises in a country’s borrowing costs. However, more than two-thirds of economists polled by the Financial Times in December said they expected the ECB to never use it.

A deeper-than-expected recession next year “may put high-deficit and high-indebted countries under more pressure,” said Mujtaba Rahman, managing director for Europe of Eurasia Consulting Group, adding that this “has the potential to lead to a softer path for monetary policy.” European Central.

Additional reporting by Amy Kazmin in Rome


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The World Bank warns the global economy is on the brink of recession

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World Bank officials have warned that the global economy is “on edge” and threatens to recession this year, as the institution revealed its latest forecasts for global growth.

The Washington-based organization expects it to be world economy To grow just 1.7 percent this year, down sharply from 2.9 percent in 2022, according to the latest edition of the biannual Global Economic Prospects report, published on Tuesday.

said Ayhan Kose, who is in charge of world bank An economist responsible for the report. “The global economy is on the brink and could easily fall into recession if financial conditions tighten.”

If the World Bank’s gloomy forecasts come true, the current decade will be the first since the 1930s to see two global recessions.

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The report follows similarly stern forecasts from the International Monetary Fund. Kristalina Georgieva, the fund’s general director, said last week A third of the global economy will fall into recession this year.

The World Bank lowered its growth forecasts for 95 percent of advanced economies and more than 70 percent of emerging market and developing economies, compared to six months ago.

“There is a lot of debate about whether the US and the eurozone will go into recession,” said Koss. “But whether they do it or not technically, they’re going to feel like they’re going through a slump.”

The bank warned that advanced economies will grow just 0.5 percent this year, down from 2.5 percent last year. In the rest of the world, growth is expected to remain unchanged at 3.4 percent. However, excluding China, developing countries will grow 2.7 percent this year, down from 3.8 percent in 2022.

The report blamed high inflation, higher interest rates, lower investment and turmoil from Russia’s invasion of Ukraine in late February for downward revisions in its forecasts.

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Kosi said the recent drop in energy prices will provide some relief. Thanks in part to the warm European winters, natural gas It is trading below the level it was in before the war caused prices to go up. While headline inflation may be set back as a result of lower energy costs, core inflation—which excludes changes in volatile items such as energy and food—remained a concern.

“There is a large list of risks to our new baseline,” said Koss. The biggest threat to growth was that central banks would raise interest rates further to tackle inflation, and keep them high so that inflation would be “consistently” in check.

He said global interest rates averaged 5 percent. A one percentage point increase would reduce global growth this year from 1.7 per cent to 0.6 per cent, with per capita output contracting by 0.3 per cent — once changes in population are factored in. That, he said, met the “technical definition of a global recession”.

Of greatest concern in the long term is the significant decline in the rate of investment growth in emerging market and developing economies. This fell from 11 percent in 2010 to 3.4 percent in 2019, with an outright contraction in 70 percent of these economies during the coronavirus pandemic — a much steeper decline than in 2009 after the global financial crisis. The bank expects the rate to remain at 3.5 percent until at least 2024, which limits future growth prospects.

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“With this rate of investment growth, you’re not going to get any upgrade in the rate of economic output,” Coss said. “It will simply be impossible to meet the challenges of climate change, poverty, and inadequate health and education systems.”

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Spain Seeks Nuclear and Hydro Energy Prices to End Windfall By Reuters

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© Reuters.

MADRID (Reuters) – Spain wants the European Union to allow it to set prices for nuclear and hydro power as it seeks to decouple the cost of producing electricity from gas and limit windfall profits, sources at the Spanish Energy Ministry said.

The energy market reform proposed by Spain seeks to prevent these energy sources with lower production costs from benefiting from higher prices for other resources that currently determine the market price.

The European Commission plans to propose a broader reform of the EU electricity market in March, in a move aimed at reducing the impact of gas prices on electricity bills for industry and households.

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Core inflation in the euro area is expected to remain lower than in the US

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Consumer demand has been a bigger driver of inflation in the United States than in the eurozone, according to research from the European Central Bank that expects continued weak fundamental price pressures in the currency bloc.

higher address inflation in the eurozone The driver was largely driven by higher energy prices, he said Economic Bulletin of the European Central Bank. However, underlying price pressures have increased more gradually in the bloc than in the US and are expected to remain subdued in the near term.

“The stronger consumption-driven recovery in the US was a major driver of the differences between core inflation in the two economies,” Gerrit Koester noted in the paper published on Tuesday, adding that the near-term growth outlook was weaker for the eurozone than for the US.

The European Central Bank has projected headline inflation in the euro area of ​​6.3 percent in 2023 and 3.4 percent in 2024, higher than in the United States, as a result of the euro area’s greater exposure to energy price shocks related to Russia. Ukraine invasion.

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However, excluding basic food and energy prices, inflation is expected to be 4.2 percent in 2023 and 2.8 percent in 2024, which is “somewhat lower” than in the United States, according to the bulletin, and closer to The European Central Bank’s target of 2 percent. This is due to the impact of higher energy prices and a less tight labor market in the Eurozone.

Low core inflation reduces pressure on central banks to raise interest rates. Markets are pricing in the possibility of an 80 per cent increase in interest rates from the current 2 per cent when the European Central Bank meets on February 2nd. There is another possibility of 20 percent for a larger increase of 75 basis points. The European Central Bank has raised interest rates by 2.5 percentage points since June last year.

The European Central Bank’s bulletin, which is published eight times a year, predicted that the eurozone would enter recession between the last quarter of 2022 and the first quarter of this year.

It showed separate data from Eurostat on Tuesday House prices in the eurozone It rose at the slowest rate in nearly two years as higher borrowing costs made it more expensive to buy real estate. In the third quarter of 2022, the annual pace of house price increases slowed to 6.8 percent from 9.2 percent in the previous quarter, the slowest rise since the first quarter of 2021.

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In the US, the contribution of demand to core inflation recently reached 2 percentage points, compared to 1.5 percentage points in the eurozone. In November, energy inflation alone accounted for 38 percent of headline inflation in the eurozone – compared to 14 percent in the United States.

Rising energy prices and the depreciating euro have reduced disposable income for households, with the bulletin noting a “strong impact” on demand for durable goods. The European Central Bank called on member states to continue targeted support to protect businesses and households from rising energy prices.

While expectations indicate that governments’ support schemes are generally fiscally neutral, and do not stimulate or restrain demand, they could become expansionary if the policies are extended throughout the year.

“To ensure that fiscal policies do not increase inflationary pressures while protecting debt sustainability and supporting appropriate fiscal growth, it is important that policies are targeted, tailored and temporary,” the ECB warned.

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