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President Vladimir Putin’s invasion of Ukraine has shattered eurozone confidence and pushed consumer price expectations to their highest level since records began in 1985.
The economic fallout from the Ukraine conflict is spreading across Europe, as already-record inflation continues to rise and Germany faces a recession due to its reliance on Russian energy. Chancellor Olaf Scholz’s advisers slashed the continent’s largest economy’s growth forecast and warned that if natural gas supplies are cut off, the economy could contract.
Officials at the European Central Bank have dismissed talk of stagflation, claiming that growth in the 19-member eurozone will still exceed 2% even in their “severe” scenario for 2022.
However, the most recent data show that the forces that would result in such an outcome are gaining traction. Furthermore, several policymakers are pushing for a rate hike this year, which could have a negative impact on output.
• Slovakia’s Peter Kazimir joined a growing number of policymakers on Wednesday in predicting a rate hike in 2022. Madis Muller of Estonia said an increase is “likely,” but not certain.
• According to Austria’s Robert Holzmann, one of the Governing Council’s leading hawks supported quarter-point moves in September and December.
• Ireland’s Gabriel Makhlouf stated that, while monetary policy will not be normalised quickly, the ECB will take whatever steps are necessary to achieve price stability.
• Belgian central bank chief Pierre Wunsch has also stated his preference for a gradual approach.
At its March meeting, the ECB stated that its primary focus is on combating inflation that is nearly three times the official target of two percent. Investors are also keeping a close eye on prices, bringing forward bets on the central bank’s deposit rate returning to zero to October from December in response to Wednesday’s unexpectedly large jump in Spain.
Germany data released later Wednesday showed inflation reached 7.6 percent, the highest level since records began after reunification in the early 1990s, with a government adviser warning that double-digit figures could be on the way.
They’ve already arrived in Lithuania, where preliminary data show that prices increased by 15.6 percent this month.
Everything will feed into Friday’s eurozone inflation figure, which analysts predict will set a new record for the single currency.
Looking ahead, energy costs, food prices, and persistent bottlenecks “are likely to raise inflation,” according to Lagarde, who called for a European plan to ensure public and private investments come online as quickly as possible.
Monetary policy can best navigate this uncertainty by emphasising the principles of optionality, gradualism, and flexibility.