The ECB seeks to reconcile soaring inflation and war risks

  • The ECB should keep its option open as the war rages on
  • Inflation at an all-time high – and rising
  • Growth forecasts reduced, inflation projection raised
  • Small change in direction likely

FRANKFURT, March 10 (Reuters) – The European Central Bank is expected to make minimal policy commitments on Thursday as the shock of Russia’s invasion of Ukraine upends its expectations for the economy and leaves policymakers struggling with new realities.

With inflation in the eurozone at an all-time high even before Moscow began its assault on Feb. 24, policymakers were expected to herald the end of years of money-printing stimulus, paving the way for a rate hike. interest at the end of this year.

But the war has shattered that consensus and the 25-member ECB Governing Council will come into the meeting divided, increasing the chances of political surprise – and the risk of a mistake.

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“No one can seriously expect the ECB to start normalizing monetary policy at such a time of great uncertainty,” said ING economist Carsten Brzeski.

The safest course appears to be for the bank to confirm its earlier decision to continue to scale back bond purchases in the next quarter while leaving all other commitments, including an end date for purchases and timing of a hike. rates, up in the air.

“We believe the ECB will aim to buy time by proceeding with the previously planned tapering in April… while increasing flexibility in the forward guidance to allow more room for action once the immediate fog lifts,” he said. said Anatoli Annenkov, economist at Société Générale. .

“As long as we avoid recession, which is our current benchmark, we expect the ECB to conclude later this spring that the policy stance will need to tighten more quickly to stabilize inflation expectations.”

Inflation in the 19 countries that use the euro could be three times higher than the ECB’s 2% target this year and is also expected to remain high next year.

A rebound in economic growth and the tightest labor market in decades should also push the ECB to abandon its ultra-accommodative policy stance and end a nearly decade-long experiment with unconventional stimulus. .

The Federal Reserve is sticking to its plan to raise U.S. interest rates next week, announcing a series of increases in borrowing costs as inflation rises.

But the conflict in Ukraine, the unprecedented sanctions imposed by Western countries on Russia and soaring commodity prices will increase uncertainty, slow growth and undermine household purchasing power, prompting caution.

Some political hawks are nonetheless likely to push the ECB to rein in the stimulus and return policy to at least a “neutral” setting, so the bank could signal an end to bond purchases in the coming months, a decision which would increase the odds of — but not cement — a rate hike in 2022.

The bank is also expected to drop any reference to a rate cut in its forecast and may remove a stipulation that a rate hike will come “shortly” after bond purchases end.


Even though Thursday sees the can fall down the road, high inflation makes the removal of stimulus almost inevitable, but the real question is how a changed world order will affect prices in the longer term, a more relevant time horizon for the ECB.

High energy prices will dampen growth and could dampen longer-term inflation as families have less to spend on other items and businesses postpone investments.

This is why the ECB’s inflation projection for 2024 should not be much different from the 1.8% it forecast three months ago.

These predictions have been so unreliable in recent months that policymakers are now openly questioning them, making them less relevant in decision-making.

The war in Ukraine is also likely to set in motion economic forces that could drive up prices in the longer term.

Increased defense spending, as several eurozone members have pointed out, and a faster green transition to wean the Russian gas bloc are both likely to boost government spending and inflation.

These could also be backed by joint debt issuance by the European Union, and the bloc would likely look to the ECB to lower its cost of borrowing.

However, it is virtually impossible to quantify the inflation costs of these long-term decisions, so the ECB’s projections will not reflect them, although policymakers are likely to raise them in the debate.

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Editing by Catherine Evans

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