Russia’s invasion of Ukraine seems to have also thwarted the plans of the European Central Bank, which was slowly but surely preparing for a gradual tightening of monetary policy.
Central bankers will meet in Frankfurt this Thursday. And they are likely to assess the risks that the war in Ukraine poses to the European economy, both in terms of the possible onset of another recession and the further rise in inflation, which is already at the highest level in the history of the euro area.
“Of all the major central banks, the European Central Bank faces the biggest dilemma,” Seema Shah, investment strategist at Principal Global Investors, told Reuters. According to him, it will be interesting to see how the ECB will deal with these risks.
On the one hand, it is necessary to count on pressure from the head of the Bundesbank, who will want to tighten monetary policy, which stems from the tradition of the German central bank. And it will not only be a question of shutting down bond purchases, but also of raising interest rates. The ECB’s Executive Board will probably have to find a compromise between a tolerable inflation rate and an acceptable economic downturn. Europe is likely to face stagflation anyway.
