Inflation was already a problem for the eurozone going into the Ukraine crisis with inflation hitting a record 5.8 percent in February. The impact of rapidly expanding commodity prices such as gas, oil, wheat and precious metals since the conflict began is only likely to take this further. Daniele Antonucci, chief economist at Quintet Private Bank, noted: “The main impact on the economy is via energy, especially in Europe – which is more exposed to Russian oil and gas, and where supply-chain linkages with Ukrainian producers of parts, components and some food ingredients are bigger.” Meanwhile though, many of the bloc’s economies have struggled with disappointing growth.
Germany, Europe’s largest economy, has even seen its central bank issue a recession warning after experiencing negative growth in the final months of 2021.
Speaking today, ECB president Christine Lagarde admitted the Ukraine conflict would have a “material impact” on inflation, adding that the bank would take “whatever action is needed.”
Inflation has been a widespread issue globally however central banks have differed in their responses.
While the Bank of England has pushed ahead with tightening monetary policy through two consecutive interest rate hikes the ECB has so far resisted such moves.
Paul Craig, portfolio manager at Quilter Investors, commented: “Given the ECB has been so far behind the curve when it comes to tightening policy, the last thing it would have wanted to be contending with was a further inflationary shock.
“This is precisely what has happened with the Russian invasion of Ukraine, and inflation in the Eurozone is now forecast to be higher for longer.”
The danger for the eurozone now would be stagflation- a period of inflation remaining high but economic growth slowing.
Mr Craig said: “The balancing act faced by the ECB is an extremely challenging one.
“On the one hand, the bloc is faced with an inflationary shock that requires quick and decisive action.
“On the other, the attempted Russian invasion of Ukraine has cast a shadow of uncertainty over Europe that could end with weak demand and recession.”
Speaking on Thursday Ms Lagarde warned “persistently high energy costs, together with a loss of confidence, could drive down demand more than expected and constrain consumption and investment.”
While keeping interest rates steady the bank has however accelerated the winding down of its Asset Purchase Programme, designed to stimulate the economy.
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Analysts have interpreted the signals from the central bank as taking a tougher and more hawkish view on inflation.
Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics, noted the ECB’s “policy stance is significantly altered from previous meetings”, predicting a rate hike would come in the final quarter of 2022, probably December.
Sarah Giarrusso, Investment Strategist at Tilney Smith and Williamson, commented: “The ECB could tread cautiously over the coming months, however, it is not likely stray from expected path of tightening policy to bring inflation back down to target.
“Money markets are expecting the first interest rate rise to occur in the second half of 2022 and our view that we are heading into a rising interest rate environment in Europe has not changed.”
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