Energy prices and especially oil-based fuels have gained new momentum in recent months due to measures (supply reduction) by the largest crude oil producers, such as Saudi Arabia, which heads the Organization of the Petroleum Exporting Countries (OPEC). , and this is a serious risk that could lead to inflation rising again, prolonging the situation of very high interest rates.
According to the Organization for Economic Co-operation and Development (OECD), which yesterday published the new interim economic outlook for September, the current scenario (without further energy and food price shocks) virtually guarantees that the Central Bank of the European Union (ECB) maintains the state of affairs. The key interest rate will remain at the current 4.5% (second highest since the existence of the euro) until early 2025 at best.
According to the OECD, in the current scenario where inflation remains high but gradually decreases, the economy is still starting to falter (as is already happening, see the case of Germany and Portugal).
In this context, the ECB must stop tightening, the OECD assumes: it will not increase its benchmark interest rates again, the same interest rates that directly determine the level of Euribor interest rates and the cost of bank loans. There is a risk that the recessions already on the horizon will cause even more damage and worsen the recessions.
However, in the outlook, the Paris-based organization issues a warning: nothing should be taken for granted at this stage, as the overall risk balance is “negative”.
One of these risks, perhaps the most prominent and threatening, is that the new wave of inflation in the energy and oil sectors will be worse than previously thought.
Yesterday, the price of a barrel of Brent crude oil, the main benchmark for Europe, approached $100, surpassing $95, the highest value in the past ten months, AFP said.
One thing is certain: the pressure from energy prices could provoke an even more violent response from central banks, pushing for new rate hikes (while the plan was to end the tightening) or fixing interest rates would extend. current maximums, but for longer.
In the case of the ECB, it could extend the 4.5% beyond 2025, for example based on the scenario assumed in this outlook.
“Energy prices remain important for both growth and inflation in G20 economies” and “the sharp declines in oil, gas and coal prices since their peaks in 2022 have contributed to the recovery in growth and the decline in inflation in the first half of 2023″.
The price of crude oil has already risen by more than 25% since May
However, Mathias Cormann, the OECD Secretary General, warned yesterday that “OPEC economies have made production cuts in recent months, and with inventories [reservas e stocks, por exemplo] With relatively low oil levels, prices have risen by more than 25% since the end of May.”
“This upward movement in oil prices has increased the contribution of energy to consumer price inflation in many G20 countries,” while previously it was easing.
Therefore, according to the Paris-based organization, there is a negative risk to the economies and living standards of citizens, “which is the possibility of adverse supply shocks in global commodity markets.”
“Food and energy prices weigh heavily on consumer price indices in many countries and are an important driver of household inflation expectations,” the OECD says. As expectations rise, central banks and, in the European case, the ECB, will soon take action and crack down on the price of money again.
According to the OECD, “the truth is that energy markets remain tight and the likelihood of disruptions to the supply of oil, coal and gas remains high”, even if energy prices are still far from their 2022 peak in the wake of the Russian invasion of Ukraine.
Therefore, “a new increase in energy prices would give new impetus to inflation and harm growth in economies that import raw materials”, as is the glaring case of Europe and the largest economy of the group, the giant Germany, which is in recession is in. .
The OECD also warns that “the resurgence of high prices and food shortages could worsen food security in a number of emerging and developing economies,” noting, for example, that the El Niño phenomenon “began in June and is expected to have a negative impact on some food sources”. harvest next year”.
In addition, the organization warns that “export restrictions by some key producers are limiting supply in world markets, especially rice, where world prices are at their highest levels in the past 15 years.”
Last but not least, “the war in Ukraine could also put new pressure on the prices of wheat, corn, cooking oil and fertilizer.”
Little gas in the economy
The OECD defended that ECB policy must maintain “necessary restrictiveness” to curb inflation, but accepted that the deterioration in credit costs could increase bankruptcies, defaults and unemployment. Note that the Eurozone stood out for negative lending, which slowed in a “sharp” manner.
According to the OECD, GDP growth is expected to increase in the eurozone, where demand is already subdued [Produto Interno Bruto] falling to 0.6% in 2023 and then rising to just 1.1% in 2024, “as the negative impact of high inflation on real incomes diminishes.”
In light of the June outlook, this is a strong downward revision to forecast economic growth in the eurozone: minus three-tenths of a point this year and minus 0.4 percentage points next year.
Eurozone inflation has also been revised downwards, but will remain well above the limit tolerated by the ECB (5.5% this year and 3% next year), meaning there is an argument for keeping rates very high or not to reduce interest rates. currently in force.
Luís Reis Ribeiro is a journalist for Dinheiro Vivo
Source: DN
