Frankfurt:The European Central Bank (ECB) has issued a warning that the escalating scale and duration of the energy crisis are expected to increase inflation and reduce economic growth across the eurozone.
According to Anadolu Agency – English, ECB President Christine Lagarde, during a news conference in Frankfurt alongside Vice-President Boris Vujcic, stated that policymakers have opted to maintain key interest rates steady while remaining poised to address heightened economic uncertainties.
Lagarde highlighted that energy prices continue to rise, posing significant risks to both inflation and growth outlooks. The increase in energy costs has driven headline inflation in the eurozone to 3.8% in September from 3.2% in August, with diesel and gasoline prices reaching new peaks. Inflation excluding energy rose to 2.3%, food inflation to 1.3%, and services inflation to 3.2%, while goods inflation slightly eased to 1.1%.
She further indicated that energy prices have surpassed the baseline projections by ECB staff from September, likely keeping headline inflation above the ECB's 2% target in the coming quarters. Despite moderate wage pressures, with compensation per employee rising by 3.3% in the second quarter, the eurozone economy showed signs of expansion in the third quarter, supported by a recovery in services and increased investment in artificial intelligence, as well as government spending on defense and infrastructure.
However, Lagarde cautioned that the risks to economic growth are primarily on the downside, exacerbated by conflicts in the Middle East and the ongoing war in Ukraine. She warned that continued disruptions in energy supplies could prolong the rise in energy prices more than anticipated, while tighter financing conditions and renewed trade tensions could further impact investment and exports.
Interest rates have generally climbed, and stock prices have decreased, with bank lending rates for firms at 3.8% in August and market-based debt costs rising to 4.1%, leading to decreased corporate loan demand. Mortgage rates increased to 3.6%, resulting in a significant drop in household demand for home loans.
Lagarde called for temporary, targeted, and tailored fiscal measures to tackle the energy shock and urged EU policymakers to swiftly finalize the legal framework for the digital euro. She reaffirmed the ECB's medium-term 2% inflation target and emphasized a data-dependent, meeting-by-meeting approach for future rate decisions without pre-committing to a specific interest rate path.