Inflation in the 19 countries that use the euro currency is at 5.8 percent per year, the highest since statistics began in 1997, and is expected to rise further in the coming months
The European Central Bank (ECB) announced Thursday that it will exit its economic stimulus program sooner than expected in order to combat record inflation, which is expected to rise further as energy prices rise due to Russia’s war in Ukraine.
The decision was difficult because the invasion has also exposed Europe to a potential hit to economic growth. The ECB, on the other hand, chose higher inflation as the greater threat, surprising many analysts who had expected no change in the bank’s roadmap for the coming months. The European Central Bank (ECB) announced Thursday that it will exit its economic stimulus program sooner than expected in order to combat record inflation, which is expected to rise further as energy prices rise due to Russia’s war in Ukraine.
The decision was difficult because the invasion has also exposed Europe to a potential hit to economic growth. The ECB, on the other hand, chose higher inflation as the greater threat, surprising many analysts who had expected no change in the bank’s roadmap for the coming months. President Christine Lagarde stated that the bank is keeping its options open and may modify its stimulus exit depending on the state of the economy. That is difficult to answer right now because there is so much uncertainty about the war’s impact.
“The economy’s prospects will be determined by the outcome of the Russia-Ukraine conflict, as well as the impact of economic and financial sanctions and other measures,” she said.
At the same time, other headwinds to growth are beginning to fade,” Lagarde said, pointing to signs that some of the supply bottlenecks that have stifled business are showing “signs of easing.”
She claimed that the impact of sharply higher energy prices could be “partially cushioned” by savings that people were unable to spend due to pandemic restrictions.
The bank’s 25-member governing council, led by Lagarde, decided to stop buying bonds in the third quarter. Previously, it stated that it would reduce them to 20 billion euros ($22 billion) per month by the end of the year and continue them indefinitely.
The purchases are intended to keep corporate borrowing costs low while also encouraging business investment and hiring.
However, the bank did not move up its target date for the first interest rate hike, abandoning a promise that rates would rise soon after the end of bond purchases. Instead, it only stated that rate changes will occur “some time after” the end of the purchases and will be “gradual.” During a press conference, Lagarde refused to be drawn on whether interest rates could be raised this year. “It could be a week after or it could be months after,” she said, referring to the end of the bond purchases.
“The ECB has signaled that it is more concerned about a further sharp rise in inflation than the negative shock to demand that the war in Ukraine will cause,” said Andrew Kenningham, chief Europe economist at Capital Economics.
Inflation in the 19 eurozone countries is running at 5.8 percent per year, the highest since statistics began in 1997, and is expected to rise further in the coming months. Inflation is expected to be well above the bank’s target of 2% this year, but to fall to 2.1 percent next year.
The European Central Bank is still trailing the US Federal Reserve, which is expected to raise interest rates several times this year, beginning with a modest increase next week in response to inflationary pressures.
Europe’s recovery from the pandemic recession has lagged, with output only reaching pre-pandemic levels at the end of last year, trailing the US, which spent more on stimulus and support.
The European bank’s road map includes the termination of a 1.8 trillion euro purchase program this month and the transfer of some of the purchases to an existing program that will now end sooner than expected. The purchases were made by the bank to help the economy during the coronavirus pandemic.
It had assumed that high oil and gas prices, as well as pandemic supply bottlenecks, were only temporary. However, that equation is changing as inflation appears to be both worse and lasting longer than previously anticipated. Fears of oil and gas supply disruptions have pushed up already high energy prices.
even higher, prompting predictions that inflation will only rise temporarily.
The eurozone’s economic growth, on the other hand, is jeopardized because Europe is more vulnerable to the continent’s war and is more reliant on Russian oil and gas than the US and China.
SOURCE: AJAZEERA
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