Just as Europe was emerging from a downturn caused by the Omicron variant of the coronavirus, Russia’s war against Ukraine has sent energy prices soaring and shaken forecasts of the region’s economic health.
Policymakers are grappling with how to stamp down inflation without knocking the economic recovery off course.
The war “will have a material impact on economic activity and inflation, through higher energy and commodity prices, the disruption of international commerce, and weaker confidence,” Christine Lagarde, the president of the European Central Bank, told reporters on Thursday.
“The risks to the economic outlook have increased substantially,” she continued, adding that the bank wanted to keep all of its options available for how to proceed.
But in the face of rising inflation, which is nearly triple the central bank’s 2 percent target, policymakers confirmed on Thursday its plans to end its pandemic-era 1.85 trillion-euro ($2.05 trillion) bond-buying program at the end of this month. It also announced that it would seek to end its older bond-buying effort in the third quarter and make fewer purchases overall if the outlook for inflation doesn’t weaken. Under a previous schedule, the older program didn’t have a proposed end date.
Last month, the annual inflation rate in the eurozone rose to 5.8 percent, up from 5.1 percent the previous month. On Thursday, the central bank raised its projections for inflation for the next three years, predicting that annual inflation for 2022 would be 5.1 percent, nearly double the forecast of 2.6 percent three months ago. Inflation is forecast to be 2.1 percent in 2023, just above the central bank’s target, and 1.9 percent in 2024.
While the higher-than-expected inflation increased pressure on the central bank to map out an end to its bond-buying programs and raise interest rates, the war is also weighing on the economy, as the higher cost of energy makes it harder for businesses to pay their bills and dampens consumer confidence.
“The prospects for the economy will depend on the course of the Russia-Ukraine war and on the impact of economic and financial sanctions,” said Ms. Lagarde, who described the conflict as “a watershed for Europe.”
The central bank cut its forecasts for economic growth this year to 3.7 percent from 4.2 percent because of the war. The bank considered other outcomes in its economic forecasting, including a more severe drag on trade and consumer sentiment from the war, but in all of its predictions inflation settled around the 2 percent target in 2024.
On Wednesday, Italy’s statistics agency estimated that the surge in energy prices could cut the country’s economic growth this year by 0.7 percentage points. On Thursday, analysts at Goldman Sachs presented a bleaker forecast for eurozone growth. They said the region’s economy would grow 2.5 percent this year, down from the 3.9 percent previously predicted.
“We recognize that there is huge uncertainty and that things can go in all sorts of directions, and we want to be able to respond to those circumstances,” Ms. Lagarde said.
The bank kept interest rates unchanged, noting that any changes to rates would happen “some time after” the end of net purchases under the Asset Purchase Program and would be gradual. In its statement, the bank dropped previous language that said rates could go lower.
Under the bond-buying schedule presented Thursday, the bank will purchase €40 billion of bonds in April, €30 billion in May and €20 billion in June. After that, purchases would be “data dependent” — in other words, dependent on economic conditions — but the bank would seek to end them in October, which some analysts have interpreted as a sign that rates could still be lifted toward the end of the year.
Unlike the Bank of England, which has already started raising interest rates, and the Federal Reserve, which plans to raise rates soon to try to combat inflation, the European Central Bank is moving at a slower pace because the inflation it is trying to tackle primarily stems from energy prices, an imported cost that the bank has little control over.
Its calculations have factored in a “significant” increase in energy prices. Russia’s invasion has already pushed gas and oil to exorbitant prices amid concern about supply from Russia and 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 of Russian oil and gas by the end of the decade, with proposals to accelerate the installation of equipment needed to generate vast amounts of clean energy, like wind and solar power. More than a third of the European Union’s natural gas came from Russia last year.
Some analysts said reports that the European Commission was considering a large spending package to fund defense and energy spending should shore up the economy and keep the European Central Bank on track.
“With fiscal policy working to mitigate the shock of higher energy prices, the E.C.B. has no reason to depart from the process of monetary policy normalization that it initiated in December,” Sylvain Broyer, an economist at S&P Global Ratings, wrote in a note before the policy announcement.
More Stories
Delaware eyes business travel, vacations hold strong
Delaware minimum wage rises to $11.75
Beebe offers lab services in Milford Delaware