Ukraine crisis, inflation risks loom over ECB meeting

European Central Bank governors meet on Thursday to reflect on record inflation and new economic uncertainty caused by war in Ukraine, with policymakers signaling a willingness to act sooner rather than later.

At its last meeting in March, the ECB said it would accelerate the end of its stimulus plan for bond purchases, with a view to ending the program in the third quarter.

An interest rate hike – the ECB’s first in more than a decade – would follow “some time” after that, he said.

But since then prices have continued to soar, with the costs of energy, raw materials and food rising in the wake of the war in Ukraine, adding to fears that the conflict could delay a post-Covid recovery. .

The US Federal Reserve and the Bank of England have already announced their first rate hikes to combat price pressures, leaving the ECB on the sidelines.

Inflation jumped to a record 7.5% in the eurozone last month, well above the ECB’s 2% target.

While no major policy changes are expected on Thursday, ECB chief Christine Lagarde’s press conference will be scoured for signs that the bank is shifting to a more inflation-fighting mode. aggressive.

“In our view, policymakers are likely to present their plans for higher interest rates,” Capital Economics said in a client note, “as inflation continues to surprise on the upside.”

Lagarde tested positive for Covid-19 last week but is still ready to chair the meeting and participate in the virtual press conference afterwards.

– ‘Too late’ –

Central bankers are using interest rate hikes as a tool to tame inflation, but pulling the trigger too soon risks hurting economic growth.

The ECB’s dilemma has been complicated by Russia’s invasion of Ukraine and Western sanctions against Moscow, as the fallout from the upheaval on international trade and energy markets remains difficult to predict.

Minutes of the ECB’s latest meeting revealed that many members of the 25-member governing council wanted “immediate further steps” to tackle inflation despite the darkening economic picture.

Some governors have called for an end to bond purchases this summer, opening the door for a rate hike in the third quarter.

Minutes showed that the ECB “has become more hawkish,” ING Bank economist Carsten Brzeski said, describing supporters of monetary policy tightening.

Joachim Nagel, the head of Germany’s powerful central bank Bundesbank, is among several ECB members who have said they expect the first rate hike this year.

He warned against “acting too late”.

– Morose consumers –

The ECB has for years maintained an ultra-loose monetary policy, pushing interest rates to historic lows to fuel growth and drive inflation below target.

He even set a negative deposit rate of minus 0.5%, meaning banks pay to store excess cash at the ECB.

He also raised billions of euros in government and corporate bonds each month to maintain credit in the 19-nation currency club. The massive stimulus is now being phased out, a move the ECB says would precede any interest rate changes.

Analysts at Capital Economics said they now expect the ECB to raise the deposit rate as early as July, followed by two more hikes before the end of the year.

Lagarde recently warned that higher energy costs due to Europe’s dependence on Russian oil and gas would make Europe’s cost of living squeeze worse.

Households were becoming increasingly pessimistic, she said, and could cut spending further.

“The longer the war lasts, the higher the economic costs will be and the greater the likelihood that we will end up in worse scenarios,” she said.

Lagarde, a former French finance minister, urged European governments to help cushion the blow through fiscal policy.

France, Spain, Germany and other countries have already taken steps to ease the burden on households and businesses, including through fuel tax cuts or heating subsidies.

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