ECB remains flexible as Russia-Ukraine war sparks ‘stagflation’ fears

The President of the European Central Bank, Christine Lagarde, attends a news conference after the meeting of the governing board in Frankfurt, Germany February 3, 2022.

Michael Probst | Swimming Pool | Reuters

FRANKFURT – The European Central Bank is set to take a cautious approach to their monetary policy meeting this week as Russia’s invasion of Ukraine affects, and is likely to be derailed, policy plans they already have for the rest of the year.

The meeting ended on Thursday, exactly two weeks after President Vladimir Putin initiated an unprovoked attack on Russia’s neighbour. The world of finance has changed dramatically since then. Oil and gas prices have risen and European bank shares have lost all and more of last year’s gains.

In short, the situation is extremely unpredictable. But one thing is for sure, inflation will be pushed even higher and growth will be affected by supply problems and high commodity prices.

In that context, the ECB is set to stay the same and opt for a wait-and-see approach.

“Energy prices and inflation will be pushed higher, while growth will weaken,” said Natixis ECB watcher Dirk Schumacher in a recent note to clients.

“As it remains uncertain at this stage how severe this ‘stagflation’ shock will become, we expect the ECB to choose to wait and see where it stands at its March meeting.”

An economy experiencing stagnant inflation is one that simultaneously experiences stagnant activity and accelerating inflation. This phenomenon was first noted in the 1970s when an oil shock resulted in a long period of higher prices but a sharp drop in GDP growth.

Inflation in the euro area was 5.1% in January and increased to 5.8% in February as energy prices skyrocketed amid a serious military escalation from Russia. Inflation could worsen as gas prices soar to historic highs and Putin threatens to stop gas supplies altogether as an answer to Western sanctions. imposed on Moscow.

“The ECB still has a big advantage over the US Fed,” said Holger Schmieding, chief economist at Berenberg.

“As a result, ECB board members can afford to agree to delay some major decisions until the outlook becomes clearer.”

The jury is still out on the economic impact the war will have on the eurozone, but there are early signs that supply chain problems will worsen, even weigh on them. burden on production, especially in the manufacturing sector.

When it comes to higher interest rates, the majority of economists polled by Reuters saw only their first increase in the last few months of this year. However, there is currently no consensus on the month by which the ECB may end its Asset Purchase Program, or APP.

“Options” will likely be the buzzword during the ECB’s press conference on Thursday afternoon as there is a strong lack of clarity in these most uncertain times.

—CNBC’s Weizhen Tan contributed to this article.

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