China’s decision to reopen its economy will boost inflation in Europe as the two compete for more energy, European Central Bank (ECB) President Christine Lagarde said.
This week there was a wide debate at the World Economic Forum in Davos, Switzerland, whether Beijing’s decision to end its “zero-corona” policy will lead to an increase or decrease in inflation. On the one hand, some argue that since the supply chains are back in operation then the reopening may ease some of the inflationary pressures that Europe has faced in recent months. On the other hand, others, including President Lagarde, point out that China will consume more energy – which will add to the inflationary pressures.
The reopening of China is “something that will be positive for China mainly, and also for the rest of the world, but for us it will be an inflationary pressure, simply because the level of energy consumed by China in the last year was certainly less than what they would have consumed this year without the restrictions. The amount of LNG ( liquefied natural gas) that they will buy from the rest of the world will be higher than what we have seen and there is not that much spare capacity in terms of oil and gas,” Lagarde said in Davos.
The International Energy Agency has warned that European companies could face higher costs when looking to buy natural gas this year because there will be more competition for the commodity. Inflation has been one of the biggest challenges for European citizens over the past year, largely thanks to higher energy bills as a result of the mutual embargo imposed by Russia.
The ECB raised interest rates four times during 2022, bringing its deposit rate to 2%. The central bank said in December that it would increase interest rates as early as 2023 to deal with rising inflation. The latest data did show some slowdown in inflation, even if it remains well above the ECB’s 2% target. Inflation in December reached 9.2% in the Eurozone, this was the second consecutive monthly decrease in price increases throughout the Eurozone.
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