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An ECB Official Has Warned That the Euro Zone is Very Vulnerable to a Recession

Gediminas Simkus, a policymaker from Lithuania, said on Friday that the possibility of a recession in the euro zone is increasing, but the European Central Bank has to keep hiking interest rates as inflation remains high and estimates may even need to be boosted.

The European Central Bank (ECB) increased its deposit rate to 1.5% on Thursday in an effort to combat inflation that is currently five times higher than its target of 2%. The ECB also stated that additional policy tightening is necessary in order to prevent rapid price growth from becoming entrenched.

Simkus said that models are having trouble calculating the consequences of one-off shocks, which has led to an underestimate of price pressures. The ECB anticipates that inflation will return to 5.5% in 2023, but Simkus stated that models have been underestimating price pressures.

According to Simkus, who is a member of the Governing Council and is responsible for determining rates, “it looks that they will be hiked again again, particularly for next year.”

As the EU struggles to cope with skyrocketing energy prices, Simkus also stated that growth predictions may need to be lowered to allow for the possibility of a recession.

According to Simkus, “the risk that the euro zone enters a technical recession has increased.” [Citation needed]

Because inflation is much too high, the European Central Bank (ECB) said that it will begin discussions in December on how it should wind down the Asset Purchase Programme, which holds 3.3 trillion euros ($3.28 trillion) worth of assets, the majority of which are government debt.

Although Christine Lagarde, the head of the ECB, did not give any more indication on what the future conversation should be on, Simkus indicated that a start date ought to be a main issue on the agenda.

“I believe this is what we should be discussing: potential start date, possible numbers, and how this would be done,” said Simkus. “I think this is what the conversation should be about.”

At the moment, the European Central Bank (ECB) reinvests all of the cash that is received from bonds that are maturing as part of the program. However, it is anticipated that the ECB will wind down the debt pile by not reinvesting all of the proceeds in the future.