The European Central Bank is likely to make as few policy commitments as possible on Thursday as the shock of Russia's invasion of Ukraine up-ends its expectations for the economy and leaves policymakers grappling with new realities.
With inflation in the euro zone at a record high even before Moscow began its assault on Feb. 24, policymakers had been expected to announce an end to years of money-printing stimulus, opening the way for an interest rate hike late this year.
"We believe the ECB will aim to buy some time by proceeding with the previously planned gradual tapering in April ... while increasing flexibility in the forward guidance to allow more room to act once the immediate fog lifts," Societe Generale economist Anatoli Annenkov said. Inflation across the 19 countries that use the euro could be three times the ECB's 2% target this year and is likely to remain elevated next year, too.
But the conflict in Ukraine, the unprecedented sanctions slapped by Western countries on Russia and soaring commodity prices will all raise uncertainty, dampen growth, and sap households' purchasing power, adding to the case for caution. High energy prices will lower growth and could be a drag on inflation in the longer term as families have less to spend on other items and firms postpone investments.
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