Fidelity’s Stupnytska: “ECB faces huge dilemma as Russian invasion of Ukraine unfolds”

Anna Stupnytska, global macro economist at Fidelity International, comments on Thursday’s ECB meeting:

“The world has changed dramatically since ECB’s last meeting. The war in Europe, sanctions, a humanitarian disaster. The huge energy shock combined with tightening in financial conditions looks very likely to push Europe into recession in H2 2022 and possibly beyond if the conflict escalates further. At the same time, inflation had already been high going into this shock and is now set for further acceleration given the massive scale of supply chain disruptions and the accompanying energy shock. In this context, the ECB is facing a huge dilemma over the next few months. While the March meeting is too early for a policy change, the overall tone came in hawkish as ECB continued to signal wind-down of the QE program in Q3 and dropped references to lower rates if needed despite the sharp rise in economic uncertainty. We think as the growth shock becomes more evident in the data over the next few weeks, ECB’s focus will likely shift away from high inflation focus towards trying to limit economic and market distress as the invasion of Ukraine and its consequences ripple through the system. We do not expect the ECB to hike rates this year (despite change in market pricing towards October in the aftermath of the statement) and we believe the risk is skewed towards more QE, not less especially if gas supplies from Russia to Europe are disrupted going forward. That said, uncertainty bounds remain elevated currently.”

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