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Goldman Sachs sees ECB and BoE keep raising rates despite recession across Europe

By Geoffrey Smith — Both the euro zone and the UK are headed for recession this year, according to the growing impact of a prolonged tightening in energy prices on the continent. To Goldman Sachs.

However, Goldman Sachs told clients in a note over the weekend that soaring inflation will still force the region’s two major central banks to raise interest rates sharply.

Analysts led by Sven Jari Stehn said they expect the UK economy to contract for three consecutive quarters from October, with weighed down by high energy prices ) Risk of high inflation20% Early next year if wholesale natural gas prices continue to rise. Stehn estimates that by the end of the second quarter 2023, UK GDP could be around 1% lower than it is now.

Meanwhile, in continental Europe, Stehn’s team expects the euro zone economy to suffer a slight contraction in the third and fourth quarters, as the energy crisis finally hampers the momentum of the post-pandemic recovery. Goldman Sachs expects Gross Domestic Product to shrink 0.1% this quarter and 0.2% in the final quarter of the year.

In both bases, Goldman analysts are at odds with their respective central banks. The Bank of England expects the U.K. economy to contract for five consecutive quarters, an even gloomier forecast. The European Central Bank, by contrast, has yet to acknowledge the prospect of a recession, even though individual policymakers have increasingly warned about the risk in recent weeks.

“While the risk is that the recession starts late, we remain concerned that the recession could be deeper and longer if natural gas supplies are disrupted further,” Stehn said.

Gas supply intentions in Russia ahead of winter heating systems. Gas monopoly Gazprom (MCX: GAZP) said it will completely shut down the Nord Stream 1 pipeline from Tuesday for three days of maintenance. However, this maintenance was unplanned and sparked fears that the pipeline will remain closed beyond September 2 nd.

French citizens need to prepare for a “difficult winter” after Gazprom cut supplies to French importer Engie, French Finance Minister Bruno Le Maire said on Tuesday Industrial gas supply for rationing (EPA: ENGIE) citing unspecified contractual disputes.

Stehn sees France and Spain – both of which are less reliant on Russian gas supplies than Germany and Italy – to be stronger in the coming recession.

In the UK and the euro zone, Stehn said the strength of the labor market appeared to be preventing a deeper contraction. Against this backdrop, he expects both the ECB and the Bank of England to continue tightening monetary policy in an effort to reduce inflation.

The European Central Bank Governing Council will meet on Thursday, a day after Eurostat releases inflation data for the euro zone for August. Last month, Germany’s inflation rate remained at 8.8% according to the harmonized Eurozone statistical method and 7.9% according to its own national statistical method. Stehn expects the ECB to each raise official interest rates by 50 basis points, raising the main deposit rate to 0.5%.

However, after last week’s “hawkish” speech by ECB board member Isabel Schnabel and others at the Fed’s Jackson Hole event “Comments, Stern said the bank may try to “early load” its rate hike 25 basis points before reverting to 50 basis points.

Stehn expects the Bank of England to do more to reduce inflation. In this regard, he also expects an upward revision of 50 basis points in September, although further such measures are likely in the fourth quarter even as the recession begins.



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