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Invasion of Ukraine threatens to scramble ECB’s plans

FRANKFURT (AFP) – Russia’s invasion of Ukraine and spiralling energy prices have upended the economic outlook and left European Central Bank (ECB) policymakers with the task of navigating the eurozone through a fresh crisis at their meeting yesterday.

The bank had been poised to take another step towards the “normalisation” of its monetary policy – by ending its crisis-era asset-purchasing programme 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 per cent for the currency club, well above the ECB’s two per cent target.

The fast pace of price rises – consistently above the bank’s previous expectations – has raised the prospects that new ECB projections yesterday 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 Head of macro at the bank ING Carsten Brzeski.

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.

Soaring energy prices triggered by Russia’s invasion of Ukraine has complicated the task of the ECB as supply chain shortages could also cause the economy to slump. PHOTO: AFP

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