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Euro zone recession will ease inflation, says ECB's Panetta

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ECB officials must consider the risk of economic contraction in the euro zone and its impact on prices when formulating next policy steps, said Fabio Panetta, member of the Executive Committee .

“If we’re going to have a significant slowdown or even a recession, that will reduce inflationary pressures,” Panetta told a panel discussion in Milan on Tuesday.

Any adjustments to monetary policy “need to be strictly data-dependent and take full account of the state of the euro zone economy,” he said. “This means first and foremost being fully aware that the odds of a euro zone slipping into recession are increasing due to the fallout from the pandemic, the shock to commodity prices in recent months, the war and its impact on trade and uncertainty. “

The European Central Bank raised interest rates by half a percentage point last month and warned that further rate hikes were needed to combat the fastest inflation since the euro was born.

“If you look at the evolution of market interest rates in recent weeks, you’ll see that real interest rates are actually not far from what can be estimated as neutral given expected inflation,” Panetta said.

The economic outlook dimmed after Russia cut natural gas supplies to the region and prices soared. Weakened demand. S&P Global’s business survey on Tuesday showed that some inflation pressures may be peaking amid signs that some inflationary pressures may be peaking. , economic activity contracted for the second month in a row.

“We should look very carefully at the dynamics of commodity prices,” Panetta said. “Recent dynamics suggest that commodity prices are actually falling. , except for natural gas. We know that natural gas prices are affected by other factors, geopolitical factors. ”

European gas prices are almost seven times what they were last year. Russia’s Gazprom PJSC (OTC: OGZPY) will stop the flow of the key Nord Stream pipeline to Germany from August for three days of maintenance 31, once again raising concerns that the link is not working after work Fears will return. Lower flows will jeopardize Europe’s efforts to fill storage sites for the colder months.

On monetary policy, “A correction is possible, but recent economic developments should prompt We take one of the main virtues of a central bank governor, and that is prudence,” he said.

(updated from paragraph 5 on comments on real interest rates, prices, central bank prudence)

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