“ECB ends Bond Purchases, indicates Rate Hikes…”

The European central bank ended its long running stimulus policy on Thursday and indicated a series of rate hikes that could even increase further from September if the inflation outlook does not improve.  Inflation is at a record 8.1% and is still on the increase.  The ECB will halt bond purchases on 1 July then will raise interest rates by 25 basis points later that month.  It will increase them again in September and could opt for a bigger move then if inflation continues to persist.  The ECB said, “The Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting.”  It further added that “the governing Council expects to raise the key ECB interest rates again in September.”   “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting”.  The contributing factor for the rapid increase in inflation was energy prices however, the cost of food and services are also on the rise.  The magnitude of the rate hikes has been discussed at length by the ECB policymakers, with Philip Lane, the Chief Economist preferring a 25 basis point move in July and September, however others suggested a 50bps increase.  Concurrently the ECB raised its inflation projections to 6.8% this year against a previous forecast of 5.1%.  Meanwhile it sees inflation in 2023 at 3.5% while in 2024 at 2.1%.  The ECB stated that, “High inflation is a major challenge for all of us.  The Governing Council will make sure that inflation returns to its 2% target over the medium term.”  Although the phase of policy tightening has started, there is uncertainty when this will end.  According to Lagarde the rates should move towards a neutral point where they neither hold back growth nor simulating.  This level is however not yet defined and is unobservable leaving investors to guess the extent to which this will go.  

OECD slashes Growth Outlook

The OECD has on Wednesday cut its growth forecasts and increased its inflation estimates amid the war in Ukraine that has had an impact on growth.  The world economy is set to grow 3% this year, much lower than the 4.5% expected by the OECD in December.  Growth is further expected to slow next year, easing to 2.8% down from a previous forecast of 3.2%, according the Paris based policy forum in its latest Economic outlook.  According to the OECD General secretary Mathias Cormann, “Russia’s war is indeed posting a heavy price on the global economy.”  He further added that, “Global growth will be substantially lower with higher and more persistent inflation.” Inflation is expected to peak to 8.5% this year in OECD countries before slipping to 6% in 2023.  However, despite the lower growth and higher inflation outlook, the OECD saw a limited risk of “stagflation” like that seen in the mid-1970s when the oil price shock triggered out of control inflation and increased unemployment. 

Eurozone GDP Growth

The economy of the eurozone grew faster in the first quarter of the year than the previous three months despite the war between Russia and Ukraine, said the European Union statistics office, revising its earlier estimates higher.  The eurozone employment growth was also revised upwards reflecting further rises in the January-March period compared to the previous quarter.  The OECD also reported in its final reading for the January-March period that the gross domestic product (GDP) of the 19 countries sharing the euro increased by 0.6% quarter-on-quarter, for a 5.4% year-on-year expansion. 

Green Sovereign Bonds

Sales of green sovereign bonds is gaining momentum as EUR 12 billion worth of debt has been raised in just the past two weeks and more issues are expected in the near future.  Market turmoil amid Russia’s invasion of Ukraine, has impacted sales of new debt even those of green bonds whose use of proceeds are earmarked for sustainable projects.  Unicredit data shows that as a result the sales of sovereign green bonds is so far lower by EUR 6 billion below previous years level.  Unicredit also estimated that the gap was already EUR 18 billion, with less than EUR 8 billion worth of green sovereign bonds sold compared with €26 billion at that point last year.  Nevertheless, Austria issued its first ever green bond amounting to a EUR 4 billion deal.  Meanwhile France followed with its first ever inflation-linked green bond whilst Germany reopened a 30-year issue.

International Trade in Goods – April 2022

A press release dated 9 June 2022 shows international trade in goods registered up to the 1^st June, 2022.  Provisional data recorded a total trade in goods deficit of €375.5 million during April, in comparison to a deficit of €286.9 million in the corresponding month of 2021.     Imports amounted to €656.9 million, while exports totalled €281.4 million representing an increase of €52.2 million in imports and a decline of €36.4 million in exports over the same month of the previous year.  The increase in the value of imports was due to mineral fuels, lubricants and related materials while on the exports side the decline was registered in chemicals.  Meanwhile, for the first four months of the year, the total trade in goods deficit increased by €291.8 million in comparison to the corresponding period of 2021 reaching €977.9 million.  Imports and exports increased by €479.7 million and €187.8 million respectively to €2,318.4 million and €1,340.5 million. Higher imports were recorded in mineral fuels, lubricants and related materials (€186.7) and machinery and transport equipment (€145.4 million).  Meanwhile, on the exports side, mineral fuels, lubricants and related materials (€127 million), Food (€31.1 million), Semi-manufactured goods (€23.1 million), and Machinery and transport equipment (€20.3 million) accounted for the main increases.

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