Almost half of the forecasting error in the Banco de España projections in the first eight months of 2022 is due to the direct effects of the greater energy price growth. And this is despite the measures adopted to contain the rise in these prices having lowered headline inflation by 1.8 pp in that period. 5. The duration and scale of the increase in energy prices, and the concurrent rises in other commodity prices, have made it difficult for firms to absorb the higher energy prices. Thus, they have gradually fed into the prices of other goods and services, doing so more forcefully than before the pandemic.2 These “indirect effects” are estimated to have contributed onethird of the increase in underlying inflation in the euro area and Spain in August (10% of headline inflation). 6. Food commodity prices have also surged, reaching historically very high levels, although they have eased since their March peak. Such higher prices are attributable to strong global demand, adverse climate factors and the higher costs of international shipping and some key inputs, such as fuel and fertilizers.3 Between December 2021 and August 2022 annual food price inflation increased by 8.1 pp in Spain (7.4 pp in the euro area),4 such that 30% of inflation in August was attributable to food (3.2 pp) (25% in the euro area).
In light of recent international experiences of bank failures, the traditional intervention criterion of lending to “solvent but illiquid” banks has been put to the test as it becomes increasingly difficult to determine the necessity for intervention as well as the method and timing of such measures. The extension of such support will therefore be based on a careful balance of various considerations, which include amongst others, its potential systemic implications, the cost of the intervention, the cost of failures, avoiding disruptions in the functioning of markets and finally its potential social implications. In order to avoid long term moral hazard, the lender of last resort is based on the rigorous application of viability tests and the “first loss principle”, where losses are borne by the shareholders of the financial institutions. The operational framework also needs sufficient flexibility, in terms of policy instruments, acceptable collateral and range of counterparties, to deal with exceptional market conditions. Going forward, cooperation arrangements for dealing with crises will continue to be further enhanced. This includes further strengthening current cooperation arrangements among the various regulatory agencies in Malaysia, as well further advancing cross-border cooperation in the region. Indeed, significant strides have already been taken to strengthen the cooperative framework between central banks and supervisory agencies in the region to promote financial stability at the regional level. These have included the establishment of various regional mechanisms for cooperation and coordination in surveillance, information sharing and crisis management.