The ECB will try to balance between war risk and raging inflation in its policy meeting today
All eyes are on the European Central Bank’s policy meeting today, as investors look for more information about the central bank’s plans on how to act in new reality, which the ECB hasn’t experienced yet.
From one side, the shockwaves from the war in Ukraine and fears of further escalation of the conflict, threaten to destabilize the economy and slow growth, as the bloc’s economy is still recovering from the crisis caused by coronavirus pandemic and is heavily dependent on Russian energy.
On the other side, the central bank faces serious threats from raging inflation which reached record highs even before the conflict in Ukraine started and showing signs of further rising.
The ECB had been expected to announce an end of the period stimulus, marked by a heavy money printing that would open the door for start of policy tightening, after keeping the interest rates near zero during the pandemic, but expectations about the start of normalizing monetary policy at such high uncertainty are fading
In such environment, the ECB will be forced to balance between the two conflicting forces, with expected first actions to be cutting the growth forecasts and raising inflation projections.
The policymakers are likely to decide to remain at the safe path and try to buy some time until the conditions possibly improve, with proceeding of previously planned gradual tapering from April, but to drop any firmer predictions of the start of rate hikes, although some hawks bet for more aggressive approach in curbing stimulus that would allow the central bank to signal the end of bond-buying in coming months in coming months and raise chances for possible first rate hike by the end of the year.