The war in Ukraine, along with Europe’s commitment to end its dependence on Russian energy, has suddenly clouded the outlook for economic growth and inflation on the continent.
In this challenging environment, the European Central Bank decided on Thursday to step out of its bond-buying program more quickly to curb rising inflation.
Inflation has already nearly tripled the central bank’s target, and the Russian invasion of Ukraine has sent energy and commodity prices soaring. The war is likely to keep inflation high longer than expected just weeks ago, and increased pressure on the central bank to end its bond-buying programs and raise interest rates. In February, annual inflation in the eurozone rose to 5.8 percent, from 5.1 percent a month earlier.
On Thursday, the central bank confirmed its plans to end its $1.85 trillion ($2.05 trillion) bond-buying program at the end of this month during the pandemic. It also announced it would seek to end its legacy bond-buying efforts in the third quarter and cut down on buying overall, if the inflation outlook doesn’t worsen. According to an earlier schedule, the older program had no proposed end date.
The bank kept interest rates unchanged.
The war in Ukraine is expected to weigh on the economy as higher energy costs make it harder for businesses to pay their bills and undermine consumer confidence.
On Wednesday, Italy’s statistical office estimated that the sharp rise in energy prices could reduce the country’s economic growth by 0.7 percentage points this year. On Thursday, Goldman Sachs analysts revised their forecast for euro-zone growth downward. They said the region’s economy would grow by 2.5 percent this year, from 3.9 percent previously forecast.
Later at a press conference, Christine Lagarde, the bank’s president, is expected to present the central bank’s latest forecasts for the economy and inflation.
But unlike the Bank of England, which has already started raising interest rates, and the Federal Reserve, which plans to raise interest rates soon to combat inflation, the European Central Bank predicts that inflation in the second half of the year will slow down. The most recent forecasts, from December, showed that inflation fell below the central bank’s target of 2 percent in 2023 and 2024. A key factor was the expectation that energy prices would stabilize, prompting policymakers to rush to raise interest rates and plan to continue buying in the older, smaller bond-buying program.
But much has changed since the last policy decision, on February 3, and expectations that energy prices would stabilize have been shattered. Russia’s invasion has pushed gas and oil to exorbitant prices amid concerns over supplies from Russia and subsequent 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 from Russian oil and gas by the end of the decade, including proposals to install equipment needed to generate massive amounts of clean energy such as wind and solar power. awaken, speed up.
Some analysts said reports that the European Commission is considering a major spending package to fund defense and energy spending should support the economy and keep the European Central Bank on track.
“As fiscal policy works to cushion the shock of higher energy prices, the ECB has no reason to deviate from the process of monetary policy normalization it initiated in December,” wrote Sylvain Broyer, an economist at S&P Global Ratings, in a note earlier. the policy announcement.