FRANKFURT, Germany—Russia’s invasion of Ukraine and spiraling energy prices have upended the economic outlook and left European Central Bank policymakers with the task of navigating the eurozone through a fresh crisis at their meeting on Thursday.
The bank had been poised to take another step towards the “normalization” of its monetary policy—by ending its crisis-era asset-purchasing program and gradually bringing interest rates out of negative territory.
Instead the outbreak of war at the gates of the euro area has given inflation a new push upwards and threatened a cautious economic recovery from the impact of the coronavirus.
Inflation climbed higher again in February, hitting a new all-time high of 5.8 percent for the currency club, well above the ECB’s two-percent target.
The fast pace of price rises—consistently above the bank’s previous expectations—has raised the prospects that new ECB projections on Thursday could see a significant upwards revision for the coming years.
Record inflation and the impact of the war are to be included in the latest forecasts, but a high degree of uncertainty remains.
“No one would currently want to quantify the economic implications for the eurozone,” said Carsten Brzeski, head of macro at the bank ING.
Tightening too soon to fight inflation risks pulling the rug out from under the economy, just when it is bracing against the impact of the conflict.
In her first response to the invasion, ECB President Christine Lagarde said the central bank would “take whatever action is necessary” to stabilize the euro region’s economy.
Observers will be listening closely to the former French finance minister’s remarks in a press conference at 1330 GMT for any details of what this might mean in practice.
The ECB is likely to stick to what it has already announced “while at the same time keeping maximum flexibility,” Brzeski said.
At its last meeting in February, the Frankfurt-based institution confirmed its plan for “step-by-step” reduction in its massive bond-buying program, its main crisis-fighting tool, aimed at keeping borrowing costs low and stoking economic growth.
After the end of net purchases, with the plan already laid out till October, hiking interest rates becomes a possibility under the ECB’s guidance.
Currently, rates sit at historic lows, including a negative deposit rate which effectively charges banks to park their cash at the ECB overnight.
