The great rise in Energy priceswhich exceeded 10 percent during the last two weeks, may bring inflation back to the forefront if it continues for a long period, weakening the efforts made by the central bank to reduce it to acceptable levels..
With supply chains having difficulty recovering after previous crises, such as the pandemic and the Russian-Ukrainian war, any new disruption could worsen the economic situation and increase inflationary pressures in the region. Despite the European Central Bank’s attempts to maintain price stability through its monetary policies, the continued rise in energy prices may prompt it to reconsider its current strategy.
In light of these developments, the most important question remains: Can he? European Central Bank Will the conflict in the Middle East preserve its gains in the fight against inflation, or will the conflict in the Middle East return inflation to worrying levels?
On September 12, the European Central Bank reduced the main interest rate on deposits by 25 basis points, for the second time this year, to 3.50 percent, compared to 3.75 percent, which is the level it reached last June after reducing it by 25 points, down from its record level of 4. percent, as the bank indicated at the time that the decline in inflation and the slowdown in economic growth allowed for a little easing of monetary policy.
This cut came after an unprecedented series of interest rate hikes in the euro zone starting in mid-2022 to rein in inflation, which slowly declined towards the European Central Bank’s target of 2 percent, recording 2.6 percent last May on an annual basis, the month before the first cut. Interest rate, but it continued to slow significantly during last September, recording 1.8 percent on an annual basis, falling below the 2 percent threshold for the first time in more than three years.
The European Central Bank had kept key interest rates unchanged five consecutive times, the last of which was at its last April meeting, when the rate was 4 percent, the number it reached in September 2023, after 10 increases since December 2021. These increases came as a result of the continuous rise in the inflation rate, which… In August 2022, it reached an all-time high of 9.1 percent.
While the President of the French Central Bank, François Villeroy de Galhau, expected that the European Central Bank would reduce interest rates at its meeting on October 17 for the third time this year due to weak economic growth, economic reports and experts confirm that the conflict in the Middle East may exacerbate instability in the global economy. , which contributes to increasing the state of uncertainty and harming efforts aimed at combating inflation.
The International Monetary Fund has warned of the major economic repercussions that could result from the escalation of the conflict in the Middle East. Julie Kozak, spokeswoman for the Fund, stated in a press statement that global prices for basic commodities, such as oil and grains, have risen as a result of this conflict, in addition to increased shipping costs, due to ships avoiding attacks on shipping in the Red Sea.
Reports from the New York Times also indicated that investors have begun to take into account the increasing risks in the region, especially after the escalation between Iran and Israel, which led to a rise in oil prices.
Analysts at Capital Economics believe that oil prices may need to reach $90 per barrel to become influential in central bank decisions, while Brent crude prices as of last Friday reached $78 per barrel.
In the same context, Ahmed Kaya, chief economist at the National Institute of Economic and Social Research in the United Kingdom, said that this conflict may reduce the growth of global GDP and contribute to accelerating inflation as a result of the disruption of international supply chains and the rise in energy and shipping costs.
Kaya indicated in a report published by the “Business Insider” website and viewed by the “Eqtisad Sky News Arabia” website, that a rise in oil prices by $10 per barrel could increase inflation in advanced economies by about 0.4 to 0.6 percentage points, while higher shipping costs may lead to 10 percent to raise inflation by about 0.3 percentage points.
Kaya stressed that these inflationary pressures may prompt central banks to postpone cutting interest rates, which will hinder economic growth at a time when recession fears are spreading in many countries.
Continued high oil prices will bring inflation back to Europe
In an exclusive interview with the “Eqtisad Sky News Arabia” website, Tariq Al-Rifai, CEO of the “Chrome Center for Strategic Studies” in London, said, “There is a possibility of inflation returning to the eurozone as a result of the current conflict in the Middle East region,” and he explained that this is mainly related to the rise in energy prices. In Europe, where oil prices, for example Brent crude, witnessed a decline during the past months to their lowest level in more than two years, but they recorded a jump of more than 10 percent during the last two weeks.
Al-Rifai added: “The question here is whether this increase in prices will continue and become sustainable. If the rise continues, we are expected to witness the return of inflation at high rates in European countries, but this will take a few months before its impact appears.”
The second possible reason for the return of inflation is the occurrence of new disruptions in supply chains, as we saw last year with the outbreak of war between Israel and Hamas, which may also lead to an escalation of inflation on the European continent, according to Al-Rifai.
There are no signs of a change in monetary policy
Regarding monetary policies, the CEO of the Chrome Center for Strategic Studies confirmed that there are currently no indications that the European Central Bank will change its monetary policy. He added: “The bank is likely to stop making any changes at the next meeting if the financial markets stabilize. However, if a step is needed, it may be satisfied with reducing the interest rate by 25 basis points. In any case, raising interest rates seems unlikely in the future.” “Right now.”
For his part, economic expert Dr. Muhammad Jamil Al-Shabashiri said in his interview with “Iqtisad Sky News Arabia” website: “Certainly, the conflict in the Middle East region may pose a major threat to the European Central Bank’s efforts to combat inflation. Last September, the central bank reduced interest rates for the second time.” “In the context of deteriorating economic conditions in the euro area, with the inflation rate falling to 2.2 percent last August, which forced the bank to adjust its growth expectations.”
The ongoing conflict in the Middle East could lead to fluctuations in oil prices, which are vital to European economies, as the European Union relies heavily on energy imports from the region, and any potential increase in oil prices as a result of geopolitical tensions could put pressure on price levels in Europe. Markets are strongly affected by any negative news from the region, which raises energy costs and pushes inflation higher, he said.
How are monetary policies affected?
The economist mentioned three factors that could affect monetary policy as a result of the current conflict in the region:
- Inflationary pressures: High oil prices will increase the general cost of living, hampering the European Central Bank’s efforts to control price levels. Although the bank had been aiming to achieve an inflation target of 2 percent, pressures from high energy prices may make this difficult.
- Consumption: Increased energy costs will also affect household budgets, reducing private consumption, and may lead to a slowdown in economic growth, and central banks will find themselves in a difficult position between the need to combat inflation and maintain growth.
- Economic uncertainty: Uncertainty in financial markets may also lead to a decline in consumer and investor confidence, adding further complications to the economic challenges facing the European Central Bank.
The economic expert, Al-Shabashiri, explained that the trade partnership between the Middle East region and the European Union is important, as the volume of trade between the two sides reached more than 200 billion euros in 2022. Despite the mutual economic benefits, political tensions such as the Israeli-Palestinian conflict and sanctions on Iran could negatively affect. on these relationships.
