The energy crisis leaves the ECB wanting to cut and also raise interest-rates….

by Shaun Richards

Today we can link several of our themes and we can start with the subject that is on so many minds which is energy. The place that is most exposed is Europe via its reliance on gas from Russia.

Europe is developing contingency plans in case of a complete breakdown in Russian gas imports, the EU’s energy commissioner said, as she warned that any country was at risk of being cut off by Moscow.
Kadri Simson said the EU was racing to store as much gas as possible and could replace most of Russia’s deliveries this year but would have to do more if there were any “full disruption” of supplies. ( Financial Times)

We have discussed the next issue but the rationing we had observed was via price as it become uneconomic to operate if you were in an industry that used large amounts of energy resources that were/are rocketing in price.

The plans being drawn up by the European Commission would include measures to ration gas supplies to industry, according to people familiar with the proposals, while sparing households. ( FT )

This would come on top of the price rationing described in the Markit PMIs earlier this week.

Although manufacturing output growth improved slightly in May, it remained very modest after production growth had slowed to a near stand-still in April. The second quarter so far has consequently seen the weakest manufacturing expansion since the pandemic-related shutdowns in the second quarter of 2020.

Personally I think that the bit feels more realistic anyway.

However, many other manufacturing industries reported
that supply chain delays, combined with increased caution
among customers and spending by households being
diverted from goods to services, led to weaker output
growth or even falling production.

After all we had a March PMI above 56 suggesting strong growth which turned into this.

In March 2022, the seasonally adjusted industrial production fell by 1.8% in the euro area and by 1.2% in the EU, compared with February 2022.

So there are challenges anyway before we get to the issue of industry being switched off.

Industry accounts for 27 per cent of EU gas use, with chemicals, ceramics, food and glass production the biggest consumers. The commission has said it would protect key supply chains for food, security, and health and safety products. ( FT)

Actually I would be interested to see if it is still 27% as we know some companies have stopped or reduced output.

Anyway here is the new energy plan for the European Union.

Shedding Russian gas is a massive task for the EU, which before the war with Ukraine got 40 per cent of its gas supplies from Russia. This has now fallen to around 26 per cent, the commission has said.
Simson said Europe was on target to reduce that to 13 per cent by the end of the year. By then member states will have opened or expanded fixed or floating LNG terminals to handle 19bn cubic metres annually. Russia supplied 155bn cubic metres of gas last year.The Estonian commissioner said Brussels expected more gas from the US and Norway and was talking to new suppliers ( FT)


This morning brought some news which initially looked good.

(Reuters) – Spanish retail sales rose 1.5% in April from a year earlier on a seasonally and calendar-adjusted basis, after falling 4.1% in March, the National Statistics Institute (INE) said on Friday.

The monthly surge of 5.3% was strong but it highlights an issue because if you look at the underlying deflated or real index it is at 99.7 so not quite back to 2015 levels. Also it is signalling quite a lot of inflation because in the four months of 2022 recorded nominal growth is 12% higher than real growth.

Money Supply

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We can now look at things from the monetary perspective via this morning’s release from the ECB. Let us start with the short-term impact.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 8.2% in April from 8.8% in March.

It has fallen from the pandemic boost which saw growth accelerate above 16% but is still above pre pandemic rates of growth. We know that QE purchases have been cut so there should be a further slowing but the relationship is not as direct as the textbooks would make you believe ( it usually takes longer than you would think).

Next we can look further ahead ( 18-24 months) via broad money growth.

The annual growth rate of the broad monetary aggregate M3 decreased to 6.0% in April 2022 from 6.3% in March, averaging 6.2% in the three months up to April.

This is still a fair bit higher than what we saw pre pandemic as for example it fell below 4% in 2018. Also as we are not expecting much if any economic growth then this will flow into inflation and suggests the inflationary push is still continuing. As to any potential brake then that does not seem likely.

European Central Bank (ECB) President Christine Lagarde urged patience as the bank looks to pare back its now 8 trillion euro balance sheet in the face of galloping inflation ( Yahoo Finance)

She became rather vague too.

“It will come, it will come, in due course, yeah,” responded an at least a modestly uncomfortable Lagarde when presented with the sharp upward-and-to-the-right graph of the central bank’s balance sheet, and asked how she plans to bring it down. “How?” the questioner during an episode of the “College Tour” TV show pressed again. “In due course, it will come,” she assured. ( Yahoo Finance )

If we now switch to credit we see a hint that the economic slow down is leading to more borrowing.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) increased to 5.3% in April from 4.6% in March.

It looks to be businesses doing it.

while the annual growth rate of adjusted loans to non-financial corporations increased to 5.2% in April from 4.1% in March.


This week began with promises and hints of interest-rate rises by ECB President Christine Lagarde. The consensus is to expect a rise of 0.25% in July and then September to take the Deposit rate to zero. The problem with this to my mind comes from what we have looked at today.

We can start geographically with Spain where retail sales have yet to return to 2015 levels and remember we had the Euro area boom in this time. Next up is the issue of the deflationary impact of the energy price rises. We looked at the topic of the new deficit position in current account terms last week. Another way of looking at things is via the housing market.

The interest rate on loans for house purchase with a floating rate and an initial rate fixation period of up to one year increased by 5 basis points to 1.40%, mainly driven by the interest rate effect. The rate on housing loans with an initial rate fixation period of over one and up to five years rose by 4 basis points to 1.53%, driven by the interest rate effect. The interest rate on loans for house purchase with an initial rate fixation period of over five and up to ten years increased by 15 basis points to 1.54%.  ( March figures ECB)

Central bankers have long been in the game of pumping up house prices and this is potentially the beginning of a reversal. Will they carry it through? I have my doubts. They may start but how long will they keep it up for?

On the other side of the coin is inflation which so far the ECB has pretty much ignored. Quite a difference to the instant response in 2020 to the impact of the pandemic.


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