The war in Ukraine, along with Europe’s commitment to end its dependence on Russian energy, has suddenly muddied the outlook for economic growth and inflation on the continent. In this challenging environment, the European Central Bank will announce its latest policy decisions on Thursday.
Inflation is already nearly triple the central bank’s target, and Russia’s invasion of Ukraine has sent energy and commodity prices soaring. The war is likely to keep inflation elevated for longer than expected just weeks ago, and increase the pressure on the central bank to map out an end to its bond-buying programs and raise interest rates.
But while a growing number of bank policymakers have expressed unease with the high inflation, some analysts predict that any big policy decisions will be delayed because of the uncertainty brought on by the war. Members of the bank’s governing council will want to keep as many options open as possible, analysts said, because the higher cost of energy is also set to weigh on the economy as businesses struggle to pay their bills and consumer confidence falls.
On Wednesday, Italy’s statistics agency estimated that the surge in energy prices could cut the country’s economic growth this year by 0.7 percentage points. On Thursday, analysts at Goldman Sachs downgraded their forecast for eurozone growth. They said the region’s economy would grow 2.5 percent this year, down from 3.9 percent previously predicted.
“The E.C.B. faces a tough meeting,” analysts at Bank of America wrote in a note. Russia’s invasion of Ukraine and its economic consequences are likely to “delay, but not derail,” the central bank’s plans, they added.
Central bank policymakers had been on a path toward normalizing policy by ending bond-purchase programs and lifting interest rates from their deeply negative levels. The pandemic era’s 1.85 trillion-euro ($2.05 trillion) bond-buying program is set to end this month, and traders have started to bet on an interest-rate increase before the end of the year as inflation climbs to new highs. In February, the annual inflation rate in the eurozone rose to 5.8 percent, up from 5.1 percent the previous month.
But unlike the Bank of England, which has already started raising interest rates, and the Federal Reserve, which plans to raise rates soon to try to combat inflation, the European Central Bank has been forecasting inflation to slow in the second half of the year. The most recent forecasts, from December, showed inflation falling below the central bank’s target of 2 percent in 2023 and 2024. A key factor was the expectation that energy prices would stabilize, which meant policymakers weren’t in a rush to raise interest rates and had planned to keep purchases going in its older, smaller bond-buying program.
But a lot has changed since the last policy decision, on Feb. 3, and the expectation that energy prices would stabilize has been shattered. Russia’s invasion has pushed gas and oil to exorbitant prices amid concern about supply from Russia and then decisions by the United States and Britain to stop importing Russian oil.
On Tuesday, the European Commission announced a plan to make the region independent of Russian oil and gas by the end of the decade, including proposals to accelerate the installation of equipment needed to generate vast amounts of clean energy like wind and solar power.
Some analysts said reports that the European Commission was considering a large spending package to fund defense and energy spending should shore up the economy and keep the European Central Bank on track.
“With fiscal policy working to mitigate the shock of higher energy prices, the E.C.B. has no reason to depart from the process of monetary policy normalization that it initiated in December,” Sylvain Broyer, an economist at S&P Global Ratings, wrote in a note.
The central bank will publish new economic growth and inflation forecasts for the region on Thursday. Christine Lagarde, the bank’s president, said “a comprehensive assessment” of the economic outlook would include the latest developments in Ukraine.
