The European Central Bank is betting on continued, if slower, economic growth, despite the escalating fight on the EU’s eastern border.
Inflation hawks won a seat at the bank’s meeting, with the ECB surprising markets by announcing plans to phase out stimulus measures sooner than expected, in a bid to keep price.
The move opens the door to a rate hike as early as July, when ECB president Christine Lagarde insisted she wanted to “keep all options open” amid growing uncertainty caused by the global recession. Russia invaded Ukraine on 24 February.
The Federal Reserve is expected to raise interest rates next week after US inflation hit a 40-year high of 7.9pc in February. The UK started raising rates last month.
Ms Lagarde said the bank would look at the data and take “whatever action is necessary” if growth or inflation surprises in either direction.
However, some analysts say the ECB should have refused to make any moves because of the risk.
Yields on Italian, Spanish and Greek bonds rose on the news, while the euro fell back after surging higher.
“Due to the high level of uncertainty and the downside risk outlook for crystalline matter prices,” said Katherine Neiss, chief European economist at US-based global asset manager PGIM Fixed Income. This could be a decision the ECB will regret.”
ING’s head of global macro, Carsten Brzeski, said the ECB was responding to the specter of ‘stagflation’ in the style of the 1970s, where inflation rose while growth fell.
Former ECB chief economist and head of Germany’s central bank Otmar Issing yesterday told Bloomberg Television that the biggest risk to the eurozone is that “we could repeat the experience of the 70s”.
“The reason for the change of heart is clear: the war in Ukraine has sharply increased the risk of stalling inflation in the euro area,” Mr. Brzeski said.
“Excessive energy and commodity prices, potential disruptions to energy supplies, weaker trade, new supply chain disruptions and high levels of uncertainty for both companies and consumers have changed change the economic outlook of the euro area in just a few days.”
ECB staff now predict eurozone inflation will average 5.1 points in 2022 after hitting a record 5.8 points in February and seeing the economy grow by 3.7 points. points, half a point lower than the December estimate.
The ECB still sees energy prices falling again and says it has no evidence that wage increases will boost overall inflation.
However, Goodbody chief economist Dermot O’Leary said the projections were “clearly optimistic” given the sharp rise in food and energy prices caused by the war.
“Clearly more weight is being placed on the growing inflationary risks, despite the emergence of significant downside growth risks stemming from the conflict,” he said.
New figures from the Central Statistics Office show consumer price inflation in Ireland hit a 20-year high of 5.6pc last month.
KBC chief economist Austin Hughes said it was up to the Government to pick the worst, arguing that the threat to living standards now justifies a small budget, including increased welfare and subsidies. more energy.
