Russia-Ukraine war puts ECB policy move on hold

[MongiIG]

The ECB finds itself in a complicated position ahead of its meeting, as inflation rises and the war in Ukraine rumbles on.

Source: Bloomberg

 Chris Beauchamp | Chief Market Analyst, London | Publication date: Tuesday 08 March 2022 

Two weeks ago, the outlook for the European Central Bank (ECB) meeting was tough, but at least the path was relatively straightforward. A rate hike later in the year was expected, but for now policy would remain unchanged, although the stress would be laid on an expected tightening of policy.

Russian president, Vladimir Putin’s invasion of Ukraine has upended those assumptions. Oil prices have surged, as have a host of other commodity prices. This will drive consumer price inflation (CPI) yet higher, putting major pressure on the ECB to act, just as the economy begins to slow. The possibility of stagflation looms.

Recent speeches and forecasts have been made rapidly obsolete, and with so much uncertainty surrounding the war and the impact on the eurozone economy, the bank will have to give a wide range of potential outcomes. The factors driving higher prices are broadly outside the ability of the ECB to affect, and will continue to rise regardless of what the ECB does.

A cautious policy is likely to be the result, with the Governing Council looking to end the Pandemic Emergency Purchase Programme but leave the rest of the quantitative easing (QE) programme intact for now. It may also look to dial back speculation about when the first rate hike may arrive. Should the situation improve then a different policy can emerge, but for now caution is warranted.

EUR/USD outlook

A downturn in risk appetite has driven EUR/USD down further, after already dropping throughout most of 2021. Continued uncertainty may yet drive the pair back towards $1.0650, the 2020 lows. If the ECB manages to give a more hawkish outlook, then the pair may bounce, recovering $1.10. 

Source: ProRealTime