Bank of Finland governor warns of severe economic disruption


OLLI REHNGovernor of the Bank of Finland, believes that the economic situation in the euro zone has notably deteriorated this autumn, adding truth to the risks highlighted by the European Central Bank (ECB).

“Due to unusually high uncertainty in the energy supply, the likelihood of recession and even stagflation recognized in the risk assessment has, in my view, increased significantly in recent months and weeks,” he said. -he declares. quoted at an event organized by Citigroup in the United States on Friday by Helsingin Sanomat.

Stagflation refers to the condition of slow economic growth and high unemployment accompanied by persistently rising consumer prices.

The ECB estimated in September that the eurozone economy could contract by 0.9% in 2023 if Russia suspended sales of natural gas and oil transported by sea to Europe and Europe failed to reach not to find other sources of supply. The projection is also based on the assumption that uncertainty and commodity prices will remain elevated, trade will decline and funding conditions will deteriorate relative to its baseline forecast.

“The biggest problem right now is too high inflation. We have both a driver and an anchor [for inflation]: energy is the main driver of inflation in the euro zone, while subdued wage inflation serves as an anchor,” said Rehn.

Central banks have sought to contain inflation by tightening monetary policy, a move that is slowing economic growth as businesses respond to rising borrowing costs by cutting investment and households by limiting spending.

Inflation in the euro zone reached 10% in September.

The ECB raised its key rates by 0.5 percentage point in July and by 0.75 point in September. Its board of governors indicated early last month that benchmark rates should be raised even higher, making financial markets almost certain that another 0.75 point hike will be announced at the end of October.

Rehn said the central should move forward on its tightening path to keep medium-term inflation expectations near the 2% target.

Jan von GerichNordea’s chief analyst, told Helsingin Sanomat last week that the risk of stagflation has clearly increased in the euro zone, partly due to the measures taken by the ECB.

“The tightening of monetary policy is, together with the energy crisis, one of the reasons for the slowdown in economic growth, but on the other hand, it is necessary to control inflation. It remains to be seen to what extent unemployment, which is part of the definition of stagflation, will rise in the eurozone,” he said.

The International Monetary Fund (IMF) last week encouraged central banks to focus firmly and resolutely on controlling inflation.

“Almost everywhere, rapidly rising prices, especially of food and energy, are causing severe hardship for households, especially the poor,” wrote Pierre-Olivier Gourinchasthe chief economist of the IMF.

Aleksi Teivainen – HT


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