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Ukraine crisis adds to inflation jitters as ECB meets

FRANKFURT (AFP) – Soaring inflation will be in focus when European Central Bank (ECB) governors meet on Thursday, as the threat of war in Ukraine risked further fuelling already sky-high energy prices in the region.

Prices rose in the eurozone at an annual rate of five per cent in December, the highest value on record for the currency bloc, which began keeping track of inflation in 1997.

New figures for January are set to be published by Eurostat tomorrow, ahead of the meeting, with policymakers looking for indications as to whether inflation will come off the boil in 2022, as the ECB has said it expects to happen.

The Frankfurt-based institution projected a gradual return to inflation under its target of two per cent when it published its most recent forecasts in December.

The forecast grounds the ECB’s decision to initiate a “step-by-step” reduction in its asset-purchasing stimulus programmeme, a more cautious approach than its peers in the United States and the United Kingdom.

The massive bond-buying programme has been the ECB’s main crisis-fighting tool, aimed at keeping borrowing costs low and stoking economic growth in the 19-nation euro club. The meeting on Thursday was “unlikely to bring any policy changes”, said head of macro at ING Carsten Brzeski.

The 25 members of the governing council were increasingly sensitive to the risk that inflation could be higher than expected, Brzeski said, but would seek to “steer market expectations cautiously”.

The debate over future monetary policy at the ECB is closely linked to the progress of inflation and its return to the bank’s target.

As such, “the current spike in inflation seems to be challenging its commitment to leave interest rates unchanged throughout 2022”, head of macro research at Blackrock Investment Elga Bartsch told AFP. But the surge was driven by the persistence of supply bottlenecks and changes in consumer preferences, Bartsch said, “not by excessive demand or an overheating economy.”

In other words, any monetary tightening “would do little to ship containers faster from Asia to Europe or reduce energy prices”, said Brzeski.

Multi-year highs in the price for gas were one of the main forces behind record inflation at the end of last year.

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