ECB seeks to reconcile soaring inflation with war risks

FRANKFURT, March 10 (Reuters) – The European Central Bank (ECB) is likely to make as few policy commitments as possible on Thursday as the shock of Russia’s invasion of Ukraine up-ends its expectations for the economy and leaves policymakers grappling with new realities.

With inflation in the euro zone at a record high even before Moscow began its assault on Feb. 24, policymakers had been expected to announce an end to years of money-printing stimulus, opening the way for an interest rate hike late this year.

But the war has shattered that consensus and the 25-member ECB Governing Council will go into the meeting divided, raising the chances of a policy surprise — and the risk of an error.

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

The safest route would appear to be for the bank to confirm an earlier decision to continue reducing bond purchases next quarter while leaving all other commitments, including an end-date for the buys and the timing of a rate hike, up in the air.

“We believe the ECB will aim to buy some time by proceeding with the previously planned gradual tapering in April … while increasing flexibility in the forward guidance to allow more room to act once the immediate fog lifts,” Societe Generale economist Anatoli Annenkov said.

To do so, the ECB is likely to remove a stipulation that a rate hike would come “shortly” after bond purchases end. It is also expected to drop any reference to a rate cut in its guidance.

Some policy hawks are nevertheless likely to push the ECB to curb stimulus and return policy at least to a “neutral” setting, so the bank could signal the end of bond buys in the coming months, a decision that would raise the chances of — but not cement — a 2022 rate hike.

Inflation across the 19 countries that use the euro could be three times the ECB’s 2% target this year and is likely to remain elevated next year, too.

ECB seeks to reconcile soaring inflation with war risks


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