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EUROPEAN UNION

ECB resumes dollar loans to eurozone banks

The European Central Bank in Frankfurt on Tuesday resumed loans of US dollars following an agreement with the US Federal Reserve that is part of a massive EU plan to save the euro.

ECB resumes dollar loans to eurozone banks
Photo: DPA

The ECB loaned $9.2 billion (€7.2 billion) to seven eurozone banks at a fixed rate of 1.22 percent, a statement said.

Central banks in several countries agreed over the weekend to swap currencies for dollars provided by the Fed to ease tension on interbank lending markets caused by the eurozone debt crisis.

On Monday, the ECB announced several measures aimed at financial markets, including the resumption of six-month loans in euros and the purchase of public debt, something it had refused to do until now.

The exceptional moves were part of a larger plan drawn up by the EU and the International Monetary Fund to help troubled troubled eurozone countries worth up to €750 billion.

The dollar loans were agreed upon after it became more difficult for eurozone banks to obtain the US currency owing to reluctance on the part of US banks to lend it, economists said.

The procedure was also used following the collapse of the US investment bank Lehman Brothers in September 2008.

Axel Weber, the head of the Bundesbank, said on Tuesday a European Central Bank decision to buy government debt was appropriate given the eurozone’s debt crisis but warned it also carried substantial risks.

“I see this part of the governing council’s decision critically, even in this extraordinary situation,” Weber told the German financial daily Börsen Zeitung.

“It’s important to keep these risks as slim as possible,” stressed Weber, who is a leading candidate to succeed Jean-Claude Trichet as ECB president next year.

The ECB said early Monday that it would intervene in securities markets to buy government and private debt, a move that represents unprecedented and controversial support for troubled eurozone governments.

While providing critical breathing space for eurozone countries that face mounting problems getting financing on private capital markets, the decision raises questions about the the ECB’s independence from political influence.

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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