NCentral bankers from different countries have condemned Russia’s attack on Ukraine. “Our thoughts are with the people of Ukraine at this dark moment,” said ECB President Christine Lagarde. At the same time, the central bankers are also faced with the question of what their task is now. Should there be concerted action by the major central banks again, as in some other crises? In any case, the Governing Council held an informal meeting in Paris on Thursday. On Friday, ECB President Christine Lagarde attended the meeting of the Eurogroup – and the meeting of economics and finance ministers, Ecofin for short. After the meeting, Lagarde said in a press conference that the central bank would do what was necessary to ensure price and financial stability.
An important question here: What does the new shock mean for the planned turnaround in interest rates? In any case, since the attack on Ukraine, the financial markets have evidently become somewhat more cautious when it comes to expectations of interest rate hikes. The time deposit rates showed that market participants had reduced interest rate expectations at least somewhat, said Ralfcircul, an analyst at Landesbank Hessen-Thüringen (Helaba).
France promotes “optionality”
The members of the Governing Council themselves have so far been rather cautious. ECB chief economist Philip Lane had told the FAZ that the tensions were “a very important risk factor”. ECB Director Isabel Schnabel spoke of a “terrible act of aggression” and a “war shock” that clouded the global outlook. The head of the Austrian central bank, Robert Holzmann, explained that it was clear that the ECB was basically moving in the direction of normalizing monetary policy: “However, the speed may now be somewhat delayed.” For the central bank, it is always about “optionality”: In view of the uncertainty, the ECB should not commit itself and should remain flexible. Other council members seem to think similarly.
Economists expect the Governing Council to make a decision to exit the ultra-loose stance at its next monetary policy meeting on March 10th. However, big steps should not be expected – especially not now, when the attack on Ukraine is an additional burden.
The ECB will announce that it will reduce its bond purchases more quickly than planned in December, says Holger Schmieding, chief economist at Bankhaus Berenberg. It has now become uncertain whether she is already announcing an end. With regard to possible interest rate increases, she would prefer to keep a low profile.
The doves on the ECB Council, i.e. the advocates of a loose monetary policy, could use the war as an argument to postpone the change in monetary policy a little longer, says Friedrich Heinemann from the ZEW research institute – on the grounds that economic uncertainty is increasing and monetary policy is cautious have to act.
Jörg Krämer, the chief economist at Commerzbank, says that a lot depends on whether Russia reacts to the sanctions by stopping gas supplies: “If that were already apparent in the run-up to the March meeting of the ECB Council, the ECB would probably not make a decision to end their net asset purchases as of September.”
Interest rates could fall again
At the informal meeting of the ECB leadership in Paris, chief economist Lane presented scenarios of what consequences the Ukraine war could have for the eurozone economy. This is reported by the Reuters news agency. A medium scenario envisages that the gross domestic product will be reduced by 0.3 to 0.4 percent this year. A more extreme even provides almost one percent. Another scenario assumes practically no consequences, but this is now considered unlikely.
Meanwhile, inflation rates are likely to get a short-term boost from rising energy prices. France was the first euro country to present an estimate for February on Friday: Inflation there rose from 2.9 to 3.6 percent. In the coming week there will be figures for the euro zone. Economist Cyrus de la Rubia expects 5.5 to 6 percent. The Ifo Institute now believes that average annual inflation of more than 5 percent in 2022 is possible for Germany.
Economics professor Volker Wieland says: “I think the ECB has already kept enough options open, for example with regard to bond purchases and the provision of liquidity, so that it can counteract the possible negative effects of war uncertainty and sanctions on the financial system in particular”. He thinks that the effects on gas and oil prices are likely to be highly inflationary: “Accordingly, inflation will be even higher than previously expected.” she can make adjustments when she has more information about current developments in the Ukraine war.”
Meanwhile, Putin’s attack in Germany could actually depress construction interest rates, which had just risen again to 1.6 percent. In any case, the credit portal Interhyp considers this to be plausible, because the yield on the ten-year federal bond, on which the construction interest is based, fell noticeably on Thursday. The bonds have been in particularly high demand since the attack on Ukraine as a “safe haven”, which is driving up the prices of the paper and depressing yields. Interhyp board member Mirjam Mohr said: “It is also clear that the ECB’s monetary policy options will be influenced by the war – given the new situation, we do not expect the ECB to take any drastic measures at its March meeting.”