The energy crisis and Russia’s play with gas flows have greatly increased the eurozone’s chances of heading into a recession, making things more difficult for the European Central Bank, which has just begun aggressively raising interest rates to tame the runaway inflation that has set a new record at 8.9. % in July and could immediately face a deep recession in the economy. This evokes a sense of déjà vu, as it strongly resembles a policy mistake made in 2008 and 2011, when the ECB board, led by Jean-Claude Trichet, raised interest rates in the midst of the financial and debt crisis to force a quick policy change when growth collapsed. . Both then and now, the ECB had a basis for its mandate to maintain price stability.

Bank of Greece Governor Yiannis Sturnaras said last week that the rise in global interest rates will stop no later than the end of 2023, and rates could start to fall if the eurozone enters a recession. “Central banks will raise interest rates as inflation rises, until the end of 2023 at the most. Then we will start to reduce them. Perhaps even earlier. If the global economy, and especially the European one, goes into recession from 2023, don’t be surprised if we start reducing interest rates from 2023 instead of raising them,” he said in an interview with SKAI radio.

Mr Sturnaras became the first ECB board member to admit that a recession could end the rate hike cycle early. Analysts and economists who spoke to K believe that while inflation data for July points to another aggressive rate hike in September, the tightening cycle could end even as late as 2022 as Europe’s heavy reliance on Russian natural gas turns energy into Putin’s powerful weapon. capable of destroying the economy. At the same time, they agree that if the recession turns deep, the ECB will be forced to apply monetary easing again next year.

“The way Russia plays with Europe, increasing and decreasing natural gas flows, shows that the risks of a complete shutdown before winter have increased significantly,” K said. This would undermine efforts to store energy and at least make the use of bonds inevitable , as he assesses, while stressing that the data makes it very clear that the risk of a recession in the euro area has now increased significantly.

Analysts estimate that in the coming weeks and other board members. The ECB, on the dove side, could continue with statements similar to those of the Greek banker, highlighting the bilateral risk associated with the ECB’s next steps.

According to analysts and economists, the tightening cycle may stop even at the end of 2022.

“We believe the ECB’s tightening cycle will end this year. The September meeting will be accompanied by a new set of forecasts that are expected to show a recession over the winter,” Antoine Bouvet, a strategic interest rate market analyst at ING, told K. This, he adds, will make further rate hikes even more difficult for the ECB, even if inflation comes down in 2023. Which, according to Mr. Bouvet, will strengthen the voices of the ECB’s doves, cause a reassessment of the market (and this has largely already been done), raise concerns about Europe’s energy supply.

It is worth noting that the market now expects the ECB to stop raising interest rates when they reach 1% in December, from the 2.50% that was set in mid-June.

According to ING, political instability in Italy, the ongoing war in Ukraine with a deepening energy crisis and a looming recession suggest that there is little room for further ECB rate hikes. “We expect the ECB to raise interest rates again by a total of 50 basis points before the start of winter. Then, for now, we do not expect further rate increases. “Instead of a long road of raising rates, the normalization of ECB policy now looks more like a short cut,” the Dutch bank notes.

“We have long anticipated a turnaround by the ECB at the end of the year, but the chances of a more dovish stance at the start are rising and this could already stop the rate hike cycle after two more hikes in September and October,” said Oxford Economics’ Mr Rakau. According to him, undoubtedly, the most likely trigger will be signs of a recession. According to him, the ECB will raise interest rates by 50 bp. in the next session and will continue in two increases of 25 b.p. followed by a pause in 2023.

“But we think there is a growing possibility that the December hike will not materialize, or that there will only be a 25 basis point move. in September, depending on how quickly growth declines,” he says, but he estimates that if there are signs of a deep or longer recession, the ECB could change its policy in 2023 and continue cutting interest rates. “Besides, the answer will depend on the inflationary environment. The sooner inflation recedes, the sooner the ECB can stop raising or even consider lowering,” he notes.

A flurry of reports from international houses on the economic downturn in the EU

A recession in the Eurozone is now the base case for many international houses, and how deep it will be will determine the energy front. The slowdown seen in other major economies such as the US or China may have been avoided in the second quarter (0.7%) thanks to the recovery in tourism, but the picture will be very different in the second half of the year, as the positive impact of the discovery will disappear.

“Our main forecast is a recession in Europe in 2022-2023, and recent further cuts in natural gas supplies from Nord Stream 1 have only increased the risks,” said K. Berenberg economist Salomon Fielder. “Declining deliveries from Russia and a jump in natural gas prices are the main reasons for our short-term pessimism about the European economy,” he adds. The economist estimates that the ECB will stop raising interest rates at the end of 2022, as the “doves” of the board will increasingly call for an end to austerity in a recession.

Reduced supply in Russia and a sharp jump in natural gas prices are the main reasons for the forecast.

Last week, international houses warned with a plethora of reports that a recession in the eurozone is imminent. Goldman Sachs’ new base case calls for a technical recession in the eurozone, contracting by -0.1% in the third quarter and -0.2% in the fourth quarter (not yoy). As he noted, there are risks of a deeper recession in the event of a cessation of natural gas supplies, new pressure on government bonds or a recession in the United States.

For its part, JP Morgan warned that a looming eurozone natural gas supply crisis, coupled with a political crisis in Italy, would send the region into a mild recession early next year, forcing the ECB to limit rate hikes. The bank’s economists cut their eurozone growth forecast to 0.5% in the third quarter, while in the fourth quarter of 2022 and the first quarter of 2023 they expect it to contract by 0.5%.

Citigroup cut its 2023 GDP growth forecasts to -1% for the Eurozone and -2% for Germany, while Italy is also projected to enter a 0.9% recession. The US Bank said the worst-case scenario is now becoming the baseline for the region, and its recent assessment of a mild recession in the eurozone has become overly optimistic as gas prices rose another 30% and key economic indicators point to a deep recession. like 2011-2012 or even 2008-2009 is coming. “A return of GDP to pre-pandemic levels now seems unlikely unless coordinated monetary and fiscal policy leads to a very significant increase in investment,” Citi said. Given the ECB’s focus on inflation and Germany’s focus on fiscal discipline, this is highly unlikely, he said.