But now everything is different because of the war in Ukraine. Energy and raw material prices have risen drastically. This should further increase inflationary pressures. On the other hand, the crisis is weighing on the economic outlook. The ECB is therefore faced with a dilemma.
Either it sticks to its loose monetary policy and risks triggering a wage-price spiral that has not yet become apparent. Or it takes countermeasures, which is likely to put additional strain on the economy in what is already a very difficult phase. “It is no exaggeration to say that the ECB is facing its most delicate moment since it was founded,” says Thomas Gitzel, economist at VP Bank in Liechtenstein.
These four points are important at the ECB meeting:
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1. How does the ECB assess inflation?
The central bank’s new inflation forecasts are eagerly awaited. It had originally assumed that the price development would weaken at the beginning of the year due to expiring special effects.
In February, however, consumer prices in the currency area rose by 5.8 percent, more than at any time since monetary union began. Due to the rising energy prices, the strong price pressure could now last much longer.
Allianz economist Katharina Utermöhl expects inflation in the euro area to increase by one percentage point this year. The economists of the ECB Shadow Council, a panel of experts moderated by the Handelsblatt newspaper, expect an inflation rate of 4.6 percent for this year and two percent for each of the two following years.
In its forecasts in December, the ECB assumed a price increase of 3.2 percent in this year and 1.8 percent in 2023 and 2024. It will probably have to correct these values significantly upwards. It is striking that inflation expectations, which are derived from market prices, have recently also risen significantly.
2. How is the central bank reacting to the price surge?
This raises the question of how the ECB will react to inflation in terms of monetary policy. Unlike the forecasts for inflation, the growth forecasts are likely to be significantly lower than in December. This increases the risk of stagflation, i.e. a combination of high inflation and economic stagnation.
The overall situation is a special kind of challenge. Until the start of the war, experts had assumed that the central bank would set a date for the end of its net bond purchases this year at its Thursday meeting, which it has not yet done. This is a prerequisite for an interest rate hike.
Whether it will come to that, however, remains to be seen. Blackrock’s head of economic research, Elga Bartsch, believes central banks will now tolerate slightly higher inflation than in the past. In view of the high level of uncertainty, she believes it would be “not wise for the ECB to commit to a complete normalization of monetary policy or a rate hike this year”.
The chief European economist at the US investment bank Goldman Sachs, Jari Stehn, still assumes that the ECB will stop buying bonds in June. However, he believes that she will not make a decision on this in March and will orientate herself on the data situation in a timely manner.
If the ECB announces an end date as early as Thursday, it should try to ensure that the markets do not automatically draw the conclusion that interest rates will rise. At the moment, both steps are closely linked because the ECB’s monetary policy orientation, known in technical jargon as forward guidance, means that the net purchases of bonds end “shortly before” the first interest rate hike. This passage could possibly be deleted.
3. Does Lagarde comment on the euro exchange rate?
The press conference should also be about the euro exchange rate. This has fallen significantly in the past few days, at times below the $1.10 mark. In the past, a weak euro was definitely helpful for the ECB, because it ensures that products from Europe become cheaper abroad and therefore more competitive. It also makes imports more expensive, an effect that is also desirable in times of low inflation.
Now, in the context of high inflation, the situation is different. Above all, oil, gas and other raw materials are imported products that are charged in dollars. This makes them even more expensive. Some foreign exchange experts have even recently speculated that the ECB could support the euro if the exchange rate continues to fall. That would be a very drastic step that the central bank has not taken for a long time. But it is at least possible that Lagarde is trying verbally to support the euro exchange rate.
4. When will the first rate hike come?
This is currently uncertain. Before the war in Ukraine, the markets at times priced in up to two rate hikes this year. There are now indications that this will be pushed back. Allianz economist Utermöhl, for example, now only expects the first interest rate hike in the first quarter of 2023.
More: “Significantly less, but still strong growth” – This is how the war affects the global economy