ECB lift-off likely to be delayed by conflict in Ukraine – The Peninsula

ECB lift-off likely to be delayed by conflict in Ukraine – The Peninsula

QNB ECONOMIC COMMENTARY

Doha: The unprecedented strength of fiscal and monetary stimulus in advanced economies led to a rapid recovery in 2021. However, growth is slowing in 2022 and inflationary pressures are already high and rising. Higher inflation and lower GDP growth is called stagflation and is one of the most challenging situations for central banks to face.

Tighter monetary policy and financial conditions may still be necessary to prevent inflation expectations in the Euro area becoming de-anchored in response to the highest inflation since the creation of the Euro. Indeed, strong data at the beginning of the year drove a hawkish pivot from European Central Bank (ECB) at its February meeting, with follow up announcements expected at its March meeting.

However, the economic situation has now changed radically with the escalation of geopolitical tensions into conflict in Ukraine. As a result, we are facing a stagflationary shock that will impact the Euro area, mainly via a supply shock in commodity markets, particularly energy, fertilizers and grains. This week we explore the main factors influencing ECB policy, the outlook for inflation, growth and risks.

First, energy prices have surged as the conflict has escalated, with European gas prices up by over 75% from mid-February.