European Central Bank measures could hamper growth by 8%

 In Growth, Inflation, Monetary Policy, News

Measures introduced by the European Central Bank to curb inflation and reduce money supply in the Euro Zone could hamper Portugal’s economy, leading it to lose around 8% by 2025.

This is according to the ECB’s own economists who believe that “the monetary policy return to normal that began in December 2021 changed the ECB’s policy from being extremely accommodating (buying EU Member State sovereign bonds) to now operating a tight monetary policy” to control the flow of the money supply and curb inflation through higher interest rates.
At the end of 2021, when Euro Zone inflation began to rise from zero per cent because of the gap between supply and demand that was happening before the pandemic, the ECB said it would begin to normalise its policy by reducing the purchase of sovereign bonds (through programmes such as PEPP and APP – Pandemic Emergency Purchase Programme and Asset Purchasing Programme)
With the war in Ukraine and a worsening of inflation, the ECB decided to begin increasing interest rates from July that year which at the time were at their lowest levels ever. Since then interest rates have risen 375 base points, a restrictive measure designed to control inflation but has the side effect of hampering economic activity.
“Whilst the rate and magnitude of this restrictive policy have been high from a historical perspective, monetary policy affects the economy over time so that the total impact of belt-tightening will only be felt over the next few years” state the ECB economists.
These knock-on effects mean that the recovery in growth in 2024 and 2025 will be weaker than projected in December last year, owing to the tightening of monetary policy.
The results of modelling point to impacts on growth of between 5% and 13%. In other words, the average outcome suggests that the Euro Zone economies, including Portugal would have enjoyed growth of 8% over the four years 2022-2025 (2% per annum) if the ECB had decided not to reduce money supply in the economy and make loans more costly through higher interest rates.