More energy demand: Lagarde warns China’s reopening to raise inflation

It seems the world is now facing a Chinese puzzle, as European Central Bank President (ECB) Christine Lagarde on Friday said China’s decision to reopen economy would increase inflation in Europe as both of them competed for more energy.

The latest statement reflects the extensive debate this week at the World Economic Forum in Davos, Switzerland, about whether Beijing’s decision to end its zero-Covid policy will bring more or less inflation.

On the one hand, some argue that because supply chains are being restored then the reopening might ease some of the inflationary pressures that Europe has faced in recent months.

But others note that China will be consuming more energy and this will add to ongoing inflationary pressures. Lagarde, chief of the euro zone’s central bank, is among the latter group.

Talking to CNBC, she said China’s reopening is “something that will be a positive for China mostly, something that will be a positive for the rest of the world, but we will have inflationary pressure on many of us.”

The reason Lagarde cited is that “the level of energy that was consumed by China last year was certainly less than what they will consume this year, the amount of LNG [liquefied natural gas] that [they] will be buying from the rest of the world will be higher than what we have seen and there is not so much spare capacity in terms of oil and gas.

“So there will be constraints, there will be more inflationary pressure coming out of that added demand,” she added.

Similar views were expressed by Raghuram Rajan – the Reserve Bank of India’s former governor – as he said. “[If] Chinese demand for other goods starts picking up, if that creates a bigger pressure on commodity prices, for example, natural gas, big issue in Europe, if Chinese natural gas demand increases, because the factories, their households demand more electricity, then it’s going to put pressure on Europe because natural gas, they’re competing [in] the same markets for liquid natural gas.”

“So China’s opening [is] good news overall, but potentially, the inflationary impact — there could be some,” he said.

The International Energy Agency has warned that European companies might face higher costs when looking to purchase natural gas this year as there will be more competition for the commodity.

Inflation has been one of the biggest challenges for European citizens for the last year, mostly driven by higher energy bills.

The ECB raised rates four times throughout 2022, bringing its deposit rate to 2 percent. The central bank in December said it would be increasing rates further in 2023 to address sky-high inflation.

Recent data has shown a slowdown in headline inflation, even if it remains well above the ECB’s 2 percent target.

December inflation came in at 9.2 percent in the euro zone, according to preliminary numbers. This was the second consecutive monthly drop in price rises across the euro zone.

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