ECB is under pressure to restore policy credibility – The Peninsula

ECB is under pressure to restore policy credibility – The Peninsula

Doha: There are few precedents to the magnitude, breadth and depth of the negative shocks currently facing the Euro area. On the supply side, the legacy of Covid-19 related disruptions was amplified by the most significant energy crisis in decades, as the geopolitical spill overs from the Russo-Ukrainian conflict materialized and negatively affected European utilities.

On the demand side, the otherwise strong momentum from the post-pandemic economic re-opening last year is starting to falter, as high and rising inflation is depleting disposable incomes which dampens consumer as well as business sentiment.

As a result, the Euro area is being severely hit by a combination of low and slowing growth with high and rising inflation.

This creates a macroeconomic backdrop that is particularly challenging for monetary policymaking. High and rising inflation puts pressure on the European Central Bank (ECB) to lean “hawkish” and hike policy rates aggressively. Low and slowing growth magnifies the negative implications of tighter financial conditions, as it increases the cost of capital and widens Euro area inter-country risk premiums. This created a policy dilemma that so far kept the ECB on a “slow moving” stance, trailing the US Federal Reserve (Fed) and some other key central banks.

However, the latest ECB