Continue its ultra-accommodating monetary policy, at the risk of fueling inflation, or close the credit tap, at the risk of dynamiting growth? The problem was already not simple before the invasion of Ukraine by Russia, it is turning into a headache for the European Central Bank (ECB), which meets this Thursday, March 10 in Frankfurt.
In principle, the Governing Council of the ECB was to decide this Thursday on the timetable for the end of its main asset purchase program, renewed several times since 2014, but it is very likely that the normalization of its monetary policy will wait once more. In recent months, the Frankfurt institution was already resisting, refusing, unlike its British and American counterparts, to increase its main key rate, for fear of harming growth.
→ THE FACTS. Inflation: the ECB is swimming once morest the tide
With the war in Ukraine, bringing its share of uncertainties and instabilities, the situation has become even more complex. Contrary to what we initially imagined, the inflationary surge can no longer be attributed solely to the surge in energy prices (on which the ECB can do nothing), and is now the result of a more global price increase, affecting food and industrial prices, due in particular to supply problems in world trade.
According to Eurostat, inflation reached 5.8% in February in the euro zone. A figure that is likely to increase further in the coming months, fueling the discontent of the populations, by nibbling away at their purchasing power.
Fear of stagflation
Except that behind the risk of inflation, the ECB fears even more the impact of the war on European growth. After having already lowered its growth forecast at the beginning of the year for 2022 (to 4.2%), the chief economist of the ECB, Philip Lane, announced last week that new estimates might be unveiled this Thursday, March 10. To deal with it, all the options would also be on the table: according to the chief economist, the strengthening of asset purchases or refinancing operations would not be excluded in the event that the situation continues to deteriorate.
For economists, there is no worse scenario than high inflation and weak growth. This is what is called in the jargon the famous stagflation. In a note published earlier this week, Coface economists believe that in the event of a gas supply disruption to the European Union, eurozone GDP might land in negative territory. An option that the ECB, given recent events, cannot ignore.
