european council meeting october 2022

At the same time, reference was also made to easing global supply bottlenecks. If you disable this cookie, we will not be able to save your preferences. Second, the proposed recalibration was more efficient than seeking to achieve the same objective through a shorter full-reinvestment period for the Eurosystems bond holdings or through more aggressive interest rate hikes. In September euro area inflation had reached 9.9%, with soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand having led to a broadening of price pressures and an increase in inflation in recent months. EU leaders met on 6 and 7 October 2022 in Prague for the inaugural meeting of the European Political Community (EPC) and an informal meeting of the European Council. It was noted that with the adjustment of the TLTRO III conditions banks would have the incentive and the opportunity for early repayment of their borrowing, which would also contribute to the normalisation of the Eurosystems balance sheet. EU funding, grants, tenders, and how to apply. Ministerial meetings; International ministerial meetings; PMI indicators showed that there had also been a significant slowdown in the services sector in recent months, while retail sales volumes had been on a declining path since June. There were doubts as to whether, in view of the high volatility in the market, these lower gas prices would be sustained and should form the basis of a revised outlook. It was recalled that a recession would activate automatic stabilisers, which would increase spending at the same time as tax revenues declined. Finally, it was seen as appropriate to reiterate that the Governing Council stood ready to adjust all of its instruments within its mandate to ensure that inflation returned to its medium-term target of 2%. Longer-term inflation expectations (for 2027) reported in the October ECB Survey of Professional Forecasters had remained basically constant at 2.2% for headline inflation and had decreased from 2.2% to 2.1% for core inflation. President Michel stressed that European leaders listened to each other, which was the main objective and achievement of the first EPC meeting. The content of all documents (and articles) contained in this blog is the sole responsibility of the author and any opinions expressed therein do not necessarily represent the official position of the European Parliament. The European Council welcomed the EU strategy on combating antisemitism and fostering Jewish life, adopted by the Commission on 5 October 2021. Finally, Mr Lane proposed continuing to apply flexibility in reinvesting redemptions falling due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic. The idea of an informal intergovernmental gathering, on an equal footing, of heads of state or government on a continental scale was central to the joint press conference held by President Macron, the EPCs initiator, Petr Fiala, representing the host country, and the President of Moldova, Maia Sandu, representing the country which will host the next EPC meeting in the first half of 2023. However, it was recalled that wages were a lagging indicator, and some doubts were expressed as to whether the still comforting picture provided by the experimental ECB wage tracker would hold up. Bank funding costs were increasing in response to rising market interest rates. Enter your email address to subscribe to this blog and receive notifications of new posts by email. Release of the next monetary policy account foreseen on 19 January 2023. It was argued that survey-based measures had been trending upwards for some time and that market-based measures were pointing in the same direction, with no sign of a turning point. At the same time, there were no clear signs of widespread second-round effects, and longer-term inflation expectations remained broadly aligned with the 2% target. However, they were still deeply negative at short maturities and remained below the levels prevailing in previous tightening cycles, such as in December 2006, when inflationary pressures had been far less intense. The filling of the backlog of orders still supported activity, while new orders were declining. In consideration of all these arguments, the adjustment was therefore judged to be proportionate in the service of the Governing Councils mandate. The Commission's work is steered by a College of Commissioners, and led by its President. Inflation could thus decline as a result of both supply and demand factors. While amending the TLTRO III conditions might have side effects, the abrupt and unforeseeable change in circumstances justified a change in the policy stance if this was in the service of the ECBs primary objective. At the same time, it was argued that lockdowns in China had led to declines in the countrys imports of liquified natural gas, with dampening effects on gas prices. Hence, concern was expressed that this strength could be undermined if wages were overstretched in such a delicate adjustment period. The inaugural EPC meeting was attended by over 40 heads of state or government, as well as President Michel and the Commission President, Ursula von der Leyen. The tight labour market and the prolonged period of high inflation were seen as beginning to have an impact on wage growth. It would also amount to a further frontloading of interest rate increases, allowing a neutral level to be reached swiftly. While there was a risk that fiscal compensation packages would turn out to be bigger than warranted, also from a price stability perspective, it was also argued that the planned and expected additional fiscal measures were needed in view of the expected recession. Copyright European Union, 2014-2022. The European Commissions consumer survey showed that households were increasingly postponing major purchases and reducing their savings in order to maintain their consumption of basic necessities. Action by the EU on environmental protection, climate change and clean energy. It was reiterated that the Governing Council had to focus squarely on its primary objective and on bringing inflation back to target in a timely manner. Inflation in wage-sensitive HICP items had continued to increase in line with negotiated wage growth, which, however, remained relatively contained overall. Read more about the wordpress.com cookie policy and the way to control cookies on their dedicated page. The format notably enabled a focus on various crises taking place on the continent, including tensions in the eastern Mediterranean, the Armenia-Azerbaijan conflict and the situation in the Western Balkans. Turning to monetary and financial developments, bank funding costs had been gradually increasing, which reflected the changes in risk-free rates. However, reference was made to the downside scenario in the September projections, in which there would be a deeper recession in 2023 than in the baseline scenario and a higher inflation rate in 2024. Headline inflation in the euro area had exceeded headline inflation in the United States owing to much higher energy and food inflation. Council of Europe. The users that are registered in WordPress.com should consult wordpress.com terms of service. It was argued that, in many respects, the outlook was more benign than the September downside scenario. Strategy The reappraisal of monetary policy expectations had led to a broad-based tightening of financial conditions beyond risk-free rates. Members underlined that the latest inflation outcomes were not at all reassuring. High energy prices were not only increasing import costs, but were also affecting chemical exports. It was argued that a technical recession was becoming the baseline scenario and the most likely outcome. In the euro area, compared with expectations at the time of the Governing Councils previous monetary policy meeting, market pricing and survey evidence now pointed to expectations of a faster pace of policy rate hikes and a markedly higher terminal rate. Bank lending to firms had remained robust, whereas household borrowing for house purchase had reached a turning point in the summer. While both sets of data had suggested an increase in tightness in the period to the second quarter of 2022, the most recent indications from Indeed suggested a stabilisation of the ratio in the third quarter. Your European Commission. Following a proposal by Charles Michel, Ms Thrse Blanchet was appointed Secretary-General of the Council. Further information: The European Political Community (EPC) Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the European Parliament is given prior notice and sent a copy. Attention was also drawn to the unusual resilience of profits and profit margins in the light of deteriorating cyclical conditions, which was as important as wage developments when it came to factors driving inflation and inflation persistence. Global economic growth had seen a sharp reversal from a strong performance at the beginning of the year to a below-trend performance more recently. Moreover, the December staff projections would provide more information over a horizon extending up to 2025, including an assessment of how the increased recession risks, the development of commodity prices and the tightening of financial conditions since the September meeting would affect the medium-term inflation outlook. With this third major policy rate increase in a row, substantial progress would be made in withdrawing monetary policy accommodation. Accessibility For goods prices, the most recent data showed that pipeline pressures on intermediate goods prices had started to ease, although these remained very elevated. All rights reserved. The forward-looking information compiled in the experimental ECB wage tracker for the euro area showed wage agreements concluded in the third quarter of 2022 implying wage growth of 3.7% in 2023. It was recalled that what ultimately mattered was not wholesale but consumer energy prices, and that it was thus important to understand the pass-through mechanisms between the two and the corresponding time lags. Household borrowing for house purchase had reached a turning point in the summer. The latest bank lending survey indicated that credit standards had tightened, with banks becoming more concerned about the deteriorating outlook for the economy and the risks faced by their customers in the current environment. We collect cookies only to facilitate your browsing experience, such as enabling you to share our posts via social media or comment on the post. As a further tangible sign of this commitment, it should be communicated that the Governing Council expected to raise rates further. The majority of cookies will be used only if you are a registered WordPress.com user. Moreover, survey expectations had likely been measured at a cut-off date prior to the recent fall in gas prices and, if this fall were to persist, these expectations might see some downward adjustment. The ensuing normalisation of financing conditions would, in turn, exert downward pressure on inflation over the medium term. They clarified that the EPC was intended as a bi-annual informal platform hence the absence of a declaration for dialogue among equals at leaders' level. Consumer prices for food had seen a sharp increase and food producer price indices were rising. Food price inflation had also risen further, to 11.8%, owing to developments in both the unprocessed and processed food components. *** In accordance with Article 284 of the Treaty on the Functioning of the European Union. Advice on living, working or travelling in the EU, on visas and immigration for non-EU citizens, European culture. At the same time, it was recalled that market-based inflation measures contained an inflation risk premium, which had turned positive. The quadrilateral meeting envisaged between the President of Serbia, Aleksandar Vucic, and the President of Kosovo, Vjosa Osmani-Sadriu, in the presence of President Macron and the Chancellor of Germany, Olaf Scholz, did not occur, being replaced by two separate trilateral meetings attended by the Franco-German duo. As a result, while the overall euro area fiscal deficit was still expected to improve this year, it was unlikely to improve next year. For example, a quadrilateral meeting was held by the President of Azerbaijan, Ilham Aliyev, the Prime Minister of Armenia, Nikol Pashinyan, President Macron and President Michel. The European Parliament President, Roberta Metsola, addressed the leaders, noting that Ukraine is defending Europe and that 'real peace can only come with justice with a Tribunal to look into war crimes, perpetrators and restitution'. At the same time, while the difficulty of relying on precise values of these rates was acknowledged, there was agreement that, looking ahead, the Governing Council needed to continue removing accommodation with further interest rate hikes. Turning to euro area developments, economic activity in the euro area was likely to have slowed significantly in the third quarter of 2022, with the weakening expected to continue during the remainder of the year and into early 2023. In her address to the European Council, the European Parliament's President, Roberta Metsola, emphasised that war and high energy prices had led to high inflation rates, reaching 10 % in the euro area. Euro area government bond yields had risen in lockstep with risk-free interest rates, with their spreads relative to the OIS rate having remained broadly unchanged since the Governing Councils September monetary policy meeting. First, it would contribute to the normalisation of bank funding costs. By contrast, a decline in energy costs and a further weakening of demand would lower price pressures. The point was made that a correction in wholesale energy prices did not automatically imply a corresponding pass-through to HICP inflation. In addition to bilateral meetings, other formats were explored with different levels of success. Last but not least, youth is one area where a more integrated vision is needed on a continental scale. sharing sensitive information, make sure youre on a federal Summits; European Council President's schedule; Ministerial and other meetings. But it was also noted that the latest developments cautioned against simply extrapolating the very large impact that had been included in the September projections. The President of Ukraine, Volodymyr Zelensky, addressed his colleagues by video-link, while the Prime Minister, Denys Shmyhal, attended the meeting in person. Six While the direct spillovers from the financial market turmoil in the United Kingdom had been limited, euro area financial markets had not been entirely immune. The content of all documents (and articles) contained in this blog is the sole responsibility of the author and any opinions expressed therein do not necessarily represent the official position of the European Parliament. As regards the external environment, the latest data confirmed signals of slowing economic growth across countries and sectors and implied a substantial reversal of the pick-up in global activity recorded earlier in the year. 2022 The Author(s). References were made to various decompositions of inflation into underlying factors. More than 70 participants, including trainees, early career researchers and established investigators from several European countries (Austria, Bulgaria, Canada, China, Denmark, France, Germany, Italy, Lebanon, The Netherlands, Portugal, Slovakia, Slovenia, Spain, Switzerland, Turkey, UK) and the USA met face-to-face to enjoy three days of outstanding research presentations. It was thus cautioned that any alleviation of inflationary pressures on the energy side could be offset by countervailing forces. Inflation had risen to 9.9% in September, reflecting further increases in all components. Moreover, price pressures originating from international commodity markets had weakened recently, and the expected economic downturn, together with higher interest rates and tighter financial conditions, would dampen inflation in the medium term. In this respect, it was seen as necessary, following an assessment of the repayments resulting from the adjustment of TLTRO III and their impact on financial conditions, to discuss the reinvestment strategy for the APP portfolio at the Governing Councils December monetary policy meeting. Compared with the September survey, respondents now expected the path of the key ECB interest rates to steepen and shift upwards by about 100 basis points. By reducing real incomes and pushing up costs for firms, high inflation continued to dampen spending and production. In contrast, the relationship between risk-free yields and news about growth had remained rather weak, suggesting that market participants expected central banks to focus primarily on inflation. The site is secure. It was argued that uncertainty and losses in purchasing power were the main factors behind the deterioration in the outlook, reflecting lower real wages but also lower real financial wealth, given that many households held their savings in low-remunerated deposits and debt securities. Bethesda, MD 20894, Web Policies Ministerial meetings; International ministerial meetings; Preparatory meetings; We do not collect any personal data that could identify an individual user. So far, the labour market had continued to be a source of resilience for the economy but, since it generally reacted with a delay to economic activity, it was likely to lose momentum. The major risk in the short term was a further rise in retail energy prices. About the European Commission For more detailed information about the compliance of Automattic products and services with the EU General Data Protection Regulation (GDPR), please see their dedicated page. Moreover, the view was expressed that monetary tightening would probably need to continue after the monetary policy stance had been normalised and moved into broadly neutral territory. For a comprehensive description of our cookie and data protection policies, please visit Terms and Conditions page. In the same vein, indicating the size of future interest rate adjustments was seen as implying renewed forward guidance on interest rates, which the Governing Council had deemed no longer warranted. Before A statement was published after the meeting, confirming Azerbaijans and Armenias commitment to the UN Charter and the 1991 Alma Ata Declaration, in which both countries recognise each others territorial integrity and sovereignty. Permanent and temporary jobs, traineeships, how to apply, EU careers office EPSO. This was seen as a reminder that inflation had substantial distributional consequences. EU Heads of State or The September monetary data also confirmed a drop in loan flows to non-financial corporations and, in particular, to households, providing further evidence that the tightening of financial conditions was being transmitted to the real economy. The data collected for this purposes include: number of visits/visitors per page, the country of the user, and aggregate numbers of incoming and outgoing clicks. The observation was made that long-term contracts could imply long delays, with significant upward pipeline pressures still working their way through. This represented an acceleration compared with 2022 but was still a relatively moderate pace of growth. Focusing on private consumption, consumer confidence had continued to decline in the period to September, before rising marginally in October. Moreover, it was argued that maintaining the average TLTRO III rate for the remaining lifetime of the operations at a rate below the deposit facility rate risked blurring the intended policy signal, which could call into question the Governing Councils determination to bring inflation back to its medium-term target of 2% in a timely manner. Members agreed that financial conditions across markets and financing conditions for different types of borrowers had tightened significantly in anticipation of a faster and more substantial monetary policy tightening, both in the euro area and globally. President von der Leyen confirmed that Russian gas imports had been cut from 41% of total EU gas imports in February 2022 to 7.5% currently and stressed that EU Member States gas storage facilities were filled to 90%, an increase of 15% compared with one year ago. This means that every time you visit this website you will need to enable or disable cookies again. Follow the latest progress and learn more about getting involved. Focusing on core inflation, i.e. Changing the remuneration from the main refinancing operations rate to the deposit facility rate would thus restore the neutrality of the minimum reserves system. This site is managed by the Directorate-General for Communication, Follow the European Commission on social media, EU and Chile strengthen a comprehensive political and trade partnership, Press statement by President von der Leyen on the ninth package of sanctions against Russia, Capital Markets Union: new proposals on clearing, corporate insolvency and company listing to make EU capital markets more attractive, Aid, Development cooperation, Fundamental rights. A long-lasting war in Ukraine remained a significant risk. As stressed by the Czech Prime Minister, Petr Fiala, in his opening remarks, there is, for the moment, no intention to formalise meetings or to transform the EPC into an organisation of its own. First, it was noted that the rise in both headline and core inflation had come with an increase in demand-driven factors. EU leaders met on 6 and 7 October 2022 in Prague for the inaugural meeting of the European Political Community (EPC) and an informal meeting of the European Council. One such force was exchange rate depreciation, which was negatively affecting the inflation outlook on a broad basis. Successive inflation figures above the projections, heightened uncertainty and the prevailing upside risks to the inflation outlook were seen as warranting further action. At the same time, it was observed that the ratio of job vacancies to unemployed persons had remained much lower in the euro area than in the United States, pointing to a lesser degree of labour market tightness in the euro area. It was therefore necessary to adjust the interest rates applicable to TLTRO III from 23 November 2022 and to offer banks additional voluntary early repayment dates. The EU leaders also discussed means to protect critical infrastructure. Such a decrease in the size of the balance sheet was judged to be necessary and a helpful first step before considering a reduction of the asset purchase programme (APP) portfolio. Getting Ukrainian children safely to school. Moreover, the recalibration removed disincentives for voluntary early repayment of outstanding TLTRO III funds, which would reduce the Eurosystems balance sheet. It was argued that, in the event of a shallow recession, the Governing Council should continue normalising and tightening monetary policy, whereas it might want to pause if there was a prolonged and deep recession, which would be likely to curb inflation to a larger extent. Tensions in the repo market had also been reflected in the behaviour of the swap spread, i.e. A 50 basis point hike was deemed sufficient to adjust the monetary policy stance in a gradual and measured way given that market sentiment was fragile, the risk of a significant slowdown in economic activity was increasing and financing conditions had already tightened significantly since the start of the normalisation process. Against this background, the incoming data confirmed that risks to the economic growth outlook were clearly on the downside, especially in the near term. Dear EU leaders also discussed the protection of critical infrastructure, which is a key element of work conducted on resilience as part of EU-NATO cooperation. A return of inflation to the ECBs 2% target was deemed unlikely without further decisive monetary policy action. Since the last recalibration of TLTRO III in December 2020 the inflation outlook had changed fundamentally, in part owing to the war against Ukraine, which had led to an energy crisis that could not have been foreseen at the time. It was argued that falling short of these market expectations would imply an unwelcome loosening impulse, potentially undermining confidence in the Governing Councils commitment to price stability. However, pressures on consumer goods prices continued to increase, reflecting transmission lags. They clarified that the EPC was intended as a bi-annual informal platform hence the absence of a declaration for dialogue among equals at leaders level. Members widely concurred with Mr Lane that monetary policy should continue to be data-dependent and not follow a pre-set path, in accordance with a meeting-by-meeting approach to setting interest rates. Share your views on new EU policies and existing laws. During the acute phase of the pandemic, the TLTROs had played a key role in countering downside risks to price stability. Following a proposal by Charles Michel, Ms Thrse Blanchet was appointed Secretary-General of the Council. It was noted that all components of demand, including consumption, investment and exports, showed signs of weakening. We determine unique page counts by using a hashed version of the visitors IP address. Some pages embed content from third parties. At the same time, it was underlined that, although wage growth was accelerating, it could still be considered moderate and there were no indications of a wage-price spiral at present. Data continued to come in above expectations. Migration, a topic which was initially planned as part of a stand-alone roundtable, was discussed by leaders at bilateral meetings. Government bond yields had risen in tandem with risk-free interest rates, with spreads narrowing slightly, probably continuing to reflect support from the Transmission Protection Instrument and communication on flexible reinvestments under the pandemic emergency purchase programme (PEPP). The major risk in the short term was a further rise in retail energy prices. At the informal meeting of the European Council, which aimed to prepare the forthcoming formal meeting on 20-21 October 2022, EU leaders focused on Ukraine and energy. In the light of the worsening inflation outlook and the still negative short-term real interest rates, monetary policy transmission had to be accelerated. The EPC is about fostering informal cooperation among equal partners. In this context, reference was made to analysis that pointed to substantially higher inflation rates for lower income households, since energy and food items made up a greater proportion of their consumption. She stressed that solidarity and trust represent the rock on which the EPC is built. The solution to the energy problem was seen as mainly of a structural nature. As flagged in the EPRS outlook, the meeting saw a mix of plenary sessions and roundtables. It was commented that any dampening effect from a recession could be counterbalanced by an increased likelihood of second-round effects as a result of higher inflation in the short term, leading to greater inflation persistence and constituting an upside risk to the medium-term inflation outlook. The view was expressed that, while real GDP for the quarter ahead had repeatedly been underestimated in previous staff projections, it was currently likely that the projection error would have the opposite sign. Dear friends! EU economy, the euro, and practical information for EU businesses and entrepreneurs. While bank lending to firms had remained robust, as they needed to finance high production costs and build up inventories, demand for loans to finance investment had continued to decline. EU leaders' meetings. In the euro area, core inflation remained well ahead of wage inflation because the sectors with the highest price increases were not particularly labour-intensive but were relatively energy-intensive. The continued strong short-run momentum was also confirmed by the upward trend in month-on-month increases in core inflation. A weakening world economy could be an additional drag on growth in the euro area. For a comprehensive description of our cookie and data protection policies, please visit, Outcome of the European Political Community and European Council meetings in Prague on 6-7 October 2022. At the same time, it was cautioned that, so far, the hard evidence was consistent with a mild recession rather than suggesting a hard landing for the economy or a protracted downturn. Finally, Mr Lane reported the results of the October ECB Survey of Monetary Analysts. A note of caution was added, to not only look at the upper tail of the distribution when assessing risks to longer-term inflation expectations but to include the lower tail. Turning to the ECBs outstanding lending operations, members unanimously agreed with Mr Lanes proposal to change the terms and conditions of TLTRO III. First, measures to reduce energy consumption and demand. Moreover, as tax revenues had been bolstered by the inflation tax, the expected decline in inflation would have a dampening impact on revenues at a time when funding costs were rising as a result of higher interest rates, leading to a deterioration in nominal deficits. Inflation concerns had remained the dominant driver of financial market developments, as inflation outcomes had continued to surprise to the upside, leading to a renewed adjustment of market expectations for monetary policy globally. While the ECBs latest Corporate Telephone Survey showed that employment growth remained in positive territory, firms had become more pessimistic about employment, which was in line with their sentiment about economic activity. Although side effects were acknowledged, these were seen not to outweigh the benefits from the TLTRO III adjustment, which was required in order to maintain the effectiveness of monetary policy and thereby the Governing Councils ability to attain its medium-term inflation target in a timely manner. Informal European Council Meeting October 7, 2022. Turning to the monetary and financial analysis, members largely concurred with the assessment provided by Mr Lane in his introduction. However, the decomposition also showed a steady increase in the contribution from demand factors. The High Representative of the Union for Foreign Affairs and Security Policy/Vice President (HR/VP) of the European Commission, Josep Borrell, was also in attendance. This new record had been driven mainly by the rapidly rising import bill for energy. Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the European Parliament is given prior notice and sent a copy. Among those measures, inflation excluding energy and food had risen to 4.8% in September, from 4.3% in August, reflecting the impact of high utility prices on the cost structures of many sectors, the ongoing impact of supply bottlenecks and the post-pandemic recovery in demand. An official website of the United States government. Deposit rates for households and firms had also seen a significant increase and were expected to rise further in the coming months in the context of monetary policy normalisation. They also presented similarities in outcome, as no declarations were adopted, while leaders stressed, both in the EPC framework and at the informal European Council, their unity against Russia and unfailing support to Ukraine. Copyright European Union, 2014-2022. Employment and total hours worked had increased in the second quarter, by 0.4% and 0.6% respectively. The Commission's work is steered by a College of Commissioners, and led by its President. Forceful policy action was bringing about a tightening of financial conditions, with medium to longer-term real interest rates moving notably higher and risk assets continuing to be sold off. EU support for job creation, economic growth, business competitiveness, and sustainable development. Ministerial meetings; International ministerial meetings; Preparatory meetings; As highlighted by President Michel after the meeting, EU leaders considered ways of addressing the energy challenge on three levels. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful. Mr Lane recalled that core inflation was also affected by indirect effects of high energy prices, which were causing many energy-intensive sectors to raise their prices. The 25th meeting of the European Council for Cardiovascular Research (ECCR) was onsite in Villa Fiorita, Treviso Italy. ECB staff analysis, which divided goods and services into either energy-intensive or non-energy-intensive items, showed that a disproportionate share of inflation stemmed from the energy-intensive sectors. However, the deterioration in the euro area terms of trade, as the prices paid for imports rose faster than those received for exports, had also been increasingly important. At the same time, the labour market had continued to perform well in the third quarter, with the unemployment rate remaining at the historically low level of 6.6% in August. It was agreed that the next EPC meeting would take place in Chiinu, Moldova. At the same time, cash bond markets had continued to function smoothly. This was because the mechanisms were different, as regards both gas price developments and potential gas-supply rationing affecting production. Would you like email updates of new search results. In this regard, it was noted that spot prices for natural gas had seen an unexpected sharp fall in recent days and that the recent movements in global commodity markets had almost reversed the price increases posted since the beginning of the year. Regarding the transmission of policy rate adjustments to money markets, after the September rate hike the functioning of euro area repo markets had been impaired, though only temporarily. This could also be inferred from the statements of union representatives, employers and politicians. The development of an integrated energy strategy, in particular coordination with non-EU European partners, some of which notably Azerbaijan and Norway are energy producers, is needed to bring energy prices down. Overall, members agreed that the monetary policy case for adjusting the TLTRO III conditions was strong and that the resulting effects could not be achieved through other measures, as indicated by Mr Lane in his proposal. A slowdown was also visible in the PMI data, although employment indices remained on the whole above the threshold indicating growth. Turning to the monetary policy proposals, the view was widely shared that the inflation outlook continued to worsen, with inflation far too high and repeatedly above the projected figures. The impact of pent-up demand, while weakening, was still driving up prices in the services sector. Weakness in the banking sector had been a factor in past episodes but was likely not a key factor now, while the housing market at least in some countries might play a role. On the back of repeated upward inflation surprises and heightened uncertainty about the path of monetary policy required to tame inflation, market-based measures of longer-term inflation compensation in the euro area had trended upwards in recent weeks. Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings. Indicators of housing investment, such as building constructions and the PMI for residential output, had started to signal a contraction in the second quarter of this year and had continued to decline in the third quarter. With regard to wages, continued strong labour markets were likely to support higher wages, and some catch-up in wages to compensate for higher inflation was likely. Next month, Annual calendar 2022 At the same time, it was recalled that there were still substantial excess savings accumulated during the pandemic crisis that could together with fiscal support and a strong labour market bolster consumption. The earlier surges in energy prices had led to ever-faster impacts on inflation, and it remained to be seen how this would evolve when the commodity price surges were reversed. This, in turn, supported a smoother and more efficient pass-through of the Governing Councils policy rate increases to secured money market rates. In a way, the first EPC meeting mirrored the European Council in its early days, when meetings were informal, resembling fireside chats and allowing Heads of State or Government to exchange freely on the most salient issues with the aim of identifying common solutions to common challenges. It was argued that a shallow or technical recession was unlikely to keep inflation in check given its recent momentum and the risk that price increases would be difficult to reverse. At the EPC It was observed that an increasing number of economies were expected to enter a recession. Uncertainty surrounded China and the United States, with global activity being negatively affected by Chinas closure of its economy and by the global fallout from restrictive monetary policy in the United States. The .gov means its official. government site. EU leaders met on 6 and 7 October 2022 in Prague for the inaugural meeting of the European Political Community (EPC) and an informal meeting of the European Council. Summits; European Council President's schedule; Ministerial and other meetings. In this context, reference was made to the substantial upward shifts in the expectations for headline and core inflation in 2024 as reflected in the Survey of Professional Forecasters, which pointed to an increased risk of unanchoring. As regards Ukraine, the European Commission President, Ursula von der Leyen, stressed that, with the successive packages of sanctions, including the agreed oil price cap, the EU was depriving Putin's regime of the ability to wage war in Ukraine and that Team Europe (EU and the Member States) had pledged 19 billion to Ukraine (military aid excepted). Regarding the economic analysis, members broadly agreed with the assessment of the current economic situation in the euro area and the risks to the outlook provided by Mr Lane in his introduction. In this context, it was highlighted that the Governing Councils interest rate hike in September had not been transmitted smoothly to all segments of the repo markets. However, this was very different from a scenario in which the euro area entered a prolonged period of negative growth. Have your say Use of the Eurosystem facility for securities lending against cash had reached its second highest level ever after the September interest rate decision took effect. EU promotion of fundamental rights, development and humanitarian aid, current and upcoming projects, partner organisations. Since the weight of food prices in the total HICP was double that of energy prices, understanding their dynamics was very important. Inflation had increased again in September, to 9.9%. In this case, you are bound to WordPress.com terms of service. To stress the Governing Councils commitment to achieving its medium-term inflation target, it was seen as important to indicate that interest rates were expected to be raised further in order to guard against the risk of inflation expectations becoming unanchored. The https:// ensures that you are connecting to the Looking at the determinants of the euros depreciation versus the US dollar in 2022, the differences in the expected paths of policy rates had played a big role. Access EU Publications Office and law database. Moreover, Mr Lane proposed adjusting the remuneration of the minimum reserves held by credit institutions with the Eurosystem, to align it more closely with money market conditions. * Members not holding a voting right in October 2022 under Article 10.2 of the ESCB Statute. Additional inflationary pressure could emanate from the ongoing depreciation of the euro. President Ursula von der Leyen and theCollege of Commissioners Disclaimer, National Library of Medicine Regional cooperation and security in the Black, Baltic and North Seas is yet another aspect in need of a common European vision. It was also very different from the downside scenario described in the September 2022 ECB staff macroeconomic projections, as energy prices were currently much lower than had been assumed in the downside scenario. Moreover, bond issuance by euro area non-financial corporations had declined markedly, especially in the high-yield segment. The production of chemicals, which had a high energy content, had become very expensive in Europe, reducing the competitiveness of these products and their exports. The President of Ukraine, Volodymyr Zelensky, addressed the leaders by video-link at both meetings, stressing the importance of supporting Ukraine in defending itself. A weakening world economy could be an additional drag on growth in the euro area. However, it was argued that futures prices suggested some reversal of this trend and that, even after their recent decline, gas prices had been very volatile and were still many times higher than in the past. Higher inflation, lingering uncertainty and further cuts in the supply of gas from Russia had dampened consumer and business confidence and were expected to curb aggregate demand in the second half of 2022. Economic activity was likely to have slowed significantly in the third quarter of the year and was expected to weaken further in the remainder of 2022 and the beginning of 2023. Energy price inflation had remained the main driver of overall inflation, with an increasing contribution from gas and electricity prices. Careers. Despite the sharp rise in risk-free yields, sovereign spreads vis--vis the overnight index swap (OIS) rate had remained broadly unchanged and had become less sensitive to changes in risk-free yields than before the announcement of the Transmission Protection Instrument. the spread between OIS rates and sovereign bond yields of the same maturity, which had widened in some jurisdictions, partly owing to the scarcity of collateral. However, two mitigating factors were present. In this regard, it was noted that the latest data for the forward-looking PMI survey indicators for manufacturing were down for activity but up for employment. However, the latest data showed that manufacturing firms had largely worked through the backlogs accumulated over the last year, suggesting that this channel would provide less support to the economy in the future. The speech made by Volodymyr Zelenskyy, the President of Ukraine, on 7 October 2022. Members also agreed with the proposal to continue applying flexibility in reinvesting redemptions falling due in the PEPP portfolio. This had been triggered predominantly by concerns about additional cash flows into the repo market from the non-monetary policy deposits held with the Eurosystem. With regard to price developments, members generally agreed with the assessment presented by MrLane in his introduction. This website uses cookies so that we can provide you with the best user experience possible. The European Commission is to present a more detailed proposal in the coming weeks. It is addressed to the Members and staff of the EP for their parliamentary work. Mr Lane highlighted that global economic activity had continued to slow in October. While it was argued that the euro area labour market was clearly a source of strength and resilience, it was cautioned that labour markets were still undergoing normalisation in the wake of the pandemic-related crisis, also with respect to the associated swings in productivity and sectoral reallocations. The fact that food producer prices were still on a rising path implied that more pipeline pressures should be expected for food consumer prices. While so far it appeared that spending on the newly announced measures would be reduced in 2024, it was still too early to assess how temporary and targeted the measures would be. In the Survey of Monetary Analysts, the distribution appeared to have become more symmetric. These developments indicated an increasing risk that inflation might become entrenched and that second-round effects and a wage-price spiral could emerge. It was also argued that potential economic output might be lower than currently estimated. The EPC aims to boost cooperation on issues of continental concern and not to be a substitute for EU policies, in particular enlargement. She stressed that aspiring countries must stay the course on EU membership. and transmitted securely. Turning to domestic wage pressures, negotiated wages had continued to increase gradually over the last few months, even when the impact of one-off wage payments was excluded. Another issue was what a recession would imply for the resilience of the labour market. As regards longer-term inflation expectations, most measures were currently standing at around 2%, although further above-target revisions to some indicators warranted continued monitoring. The Prime Minister of Iceland, Katrn Jakobsdttir, stressed that Europe stands in solidarity against the Russian invasion in Ukraine, while Prime Minister Petr Fiala stressed that we all know in our hearts that Ukraine will win because the truth is on their side. In fact, the trade-weighted exchange rate had appreciated slightly since the September meeting. The spreads had been relatively insensitive to shifts in monetary policy expectations, which probably reflected support from the Transmission Protection Instrument and communication on flexible reinvestments under the PEPP. Moving to price pressures related to housing, rental price growth had remained below 2% in September. While the Governing Councils monetary policy actions were having the desired effect on financial and financing conditions, the current setting of the ECBs key policy rates was judged to be still accommodative, which implied that they should be increased further. Summing up, Mr Lane stressed that inflation remained far too high and would stay above the ECBs target of 2% for an extended period. Direct access to language menu (press "Enter"), Direct access to search menu (press "Enter"), Outcome of the European Political Community and European Council meetings in Prague on 6-7 October 2022. At the same time, investors had gradually shifted their attention towards the side effects of the sharp global rate hiking cycle, amid tighter funding conditions for lower-rated entities, low market liquidity and heightened volatility in repo markets. While Automattic takes care of the security of the platform, we, the European Parliamentary Research Service, own the content of the blog. This deposit reconfiguration was in line with the increase in opportunity costs of holding overnight deposits since the beginning of monetary policy normalisation. The ECB now needed to show equal determination when inflation was above the target, countering far too high inflation and preventing it from becoming entrenched, irrespective of a deteriorating outlook for economic activity. In this context it was seen as useful to also look at quarter-on-quarter inflation rates to get a better picture of inflation dynamics, given that annual rates were affected by base effects and carry-over. Supply bottlenecks were gradually easing, although their lagged impact was still contributing to inflation. However, a note of caution was voiced against equating the current outlook to the downside scenario. The goods trade balance had continued to deteriorate, reaching a deficit of around 4% in August. A long-lasting war in Ukraine was still a significant risk. The Danish Prime Minister, Mette Frederiksen, was absent from the inaugural EPC meeting for domestic political reasons, but joined her colleagues a day later for the informal meeting of the European Council. This is the EPC. Thus, the EPC brought together EU Member States, countries aspiring to become members of the EU (the Western Balkan countries, Georgia, Moldova, Ukraine and Turkey), countries which have left the bloc (the United Kingdom) and countries which do not wish to join (Iceland, Norway, Liechtenstein and Switzerland). We do not collect cookies to show advertisement nor resell any information collected with cookies to third parties. The latest bank lending survey indicated that banks had tightened their credit standards in the third quarter of the year and expected to continue tightening them in the fourth quarter. Cyclically adjusted price-earnings ratios had come down markedly from the elevated levels prevailing during the extended period of accommodative monetary policy. In her address to the European Council, the European Parliaments President, Roberta Metsola, emphasised that war and high energy prices had led to high inflation rates, reaching 10% in the euro area. Please enable it to take advantage of the complete set of features! However, respondents had significantly revised up their inflation expectations for 2024 to 2.4%. On 6 October 2022, EU leaders will meet with 17 non-EU European heads of state or government for the first meeting of the European Political Community in Prague. Education and training opportunities, EU actions on schools, youth, higher education, adult learning and vocational training. In addition, price pressures had become more broad-based, with a rising trend in core inflation and other measures of underlying inflation. Measures of underlying inflation were at elevated levels. Over the medium term inflation could turn out to be higher than expected if there were increases in the prices of energy and food commodities and a stronger pass-through to consumer prices; a persistent worsening of the production capacity of the euro area economy; a persistent rise in inflation expectations above the ECBs target; or higher than anticipated wage rises. In a pre-summit op-ed, the Prime Ministers of Albania, Edi Rama, and the Netherlands, Mark Rutte, stressed that the EPC should be driven not by bureaucracy but by flexibility and that it should be guided not by fixed agendas but by priorities that concern us all. European leaders jointly agreed on six work paths, or priority lines for cooperation. We do not make the email address visible on the comment. Doubts were expressed as to whether, at the current juncture, relaxations on the supply side would be sufficient, and it was argued that a reduction in inflation would need to be driven mostly by a lower contribution from the demand component. Accordingly, the Governing Council had to recalibrate its monetary policy stance, including the terms and conditions of TLTRO III, in order to pursue its price stability mandate. The heightened concerns about inflation had resulted in euro area risk-free yields being much more sensitive to news about inflation in 2022 than had been the case in 2021. Turning to the size of the rate increase, Mr Lanes proposal to raise the key ECB interest rates by 75 basis points was supported by a very large majority of members. The adjustment was seen as an essential part of the ongoing monetary policy normalisation process and the recalibration of the Governing Councils toolkit to ensure consistency across all monetary policy instruments. Learn more about how we use cookies, We are always working to improve this website for our users. Outlook for the European Council meeting on 20 21 October 2022 At a Glance 17-10-2022 Share this page on Facebook Share this page on Twitter Share this page on LinkedIn By contrast, a decline in energy costs and a further weakening of demand would lower price pressures. It was recalled that the monetary policy stance was still accommodative and argued that a 75 basis point increase constituted a necessary step toward a more neutral level. Most countries had contributed to the September forecast error. However, measures such as liquidity or bid-ask spreads indicated that euro area markets had continued to function well. In the euro area corporate bond market, the spreads of both high-yielding and investment-grade bonds had increased. This contrasts with, for example, EU-Western Balkans summits organised in the margins of informal European Council meetings by the countries holding the rotating Council Presidency Bulgaria, Croatia and Slovenia and chaired by the European Council President. It is addressed to the Members and staff of the EP for their parliamentary work. Policy measures should provide incentives to lower energy consumption and bolster energy supply. They now stood above the levels observed at the time of the Governing Councils previous monetary policy meeting, despite the sharp reappraisal of monetary policy expectations. The meeting brings together leaders from across the continent and aims to When assessing the fiscal stance, it was considered important to include the EU funds. Since early 2022 bank bond yields had risen by more than 300 basis points. A few members expressed a preference for increasing the key ECB interest rates by 50 basis points, taking into account that the rate hike would be accompanied by a signal on the need for further future rate hikes, by a change in the remuneration of minimum reserves, and by the adjustment of the terms and conditions of TLTRO III, all of which would imply some additional monetary policy tightening. The members of the Governing Council subsequently finalised the monetary policy statement, which the President and the Vice-President would, as usual, deliver at the press conference following the Governing Council meeting. The Dutch Prime Minister, Mark Rutte, confirmed that he discussed migration with Truss and that work should continue in a trilateral framework with France and the UK but also in a more inclusive European way. The first meeting of the European Political Community (EPC) was held in Prague (Czechia) on 6 October 2022. Governments had announced further large packages of fiscal measures in their budgetary plans for 2023, which were likely to prevent any further improvement in their deficit-to-GDP ratios. No conclusions were adopted, although exceptionally a draft statement had been circulated ahead of the summit. This distinction was widely seen as a key issue for the current economic picture and for the medium-term inflation outlook. Learn about the European Commission's role in instigating and implementing the EU's policies. As regards Ukraine, the European Commission President, Ursula von der Leyen, stressed that, with the successive packages of sanctions, including the agreed oil price cap, the EU was depriving Putins regime of the ability to wage war in Ukraine and that Team Europe (EU and the Member States) had pledged 19 billion to Ukraine (military aid excepted). Such action would also underscore the Governing Councils commitment to bringing inflation under control and keeping inflation expectations anchored. The most recent indicators suggested that GDP growth had broadly stagnated in the third quarter of the year. Moreover, the assumption of energy rationing leading to sizeable production cuts had not materialised, nor had there been a major increase in financial stress. Severe disruptions in the supply of gas had further worsened the situation, and consumer and business confidence had fallen rapidly, also weighing on the economy. It was considered noteworthy that volatility had been especially pronounced in markets that were traditionally considered low-risk, such as the money markets and the sovereign bond markets, with higher volatility in these markets since the beginning of the year than in the equity market. Upcoming events organised by the European Commission. On 6 and 7 October 2022, the EU Heads of State or Government will meet in Prague for an informal meeting of the European Council, preceded by the inaugural meeting At the EPC meeting, hosted by the current Czech Presidency of the Council of the EU, over 40 European heads of state or government expressed unity in the face of the common challenge posed by the brutal return of war on European soil, affirmed their support to Ukraine and committed to strengthening energy cooperation. Concerns were expressed especially with regard to core inflation and the broader array of measures of underlying inflation, which appeared to be gradually increasing further and with few exceptions did not point to the stabilisation that had been hoped for and that had been embedded in the September staff projections. 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