Eurozone alert after 'significant shock' nightmare – Ukraine war hits economy 'hardest'

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On Wednesday, the European Central Bank (ECB) committed to plans to end its stimulus programme in the third quarter, but failed to give any indication on its schedule, warning of uncertainties linked to the war in Ukraine. This non-committal tone saw eurozone bond yields and euro fall as markets reduced expectations for the extent of rate hikes later this year. The central bank has shown an ultra-cautious approach so far and is already lagging far behind nearly all its major peers, many of which started raising rates last year.

ECB President Christine Lagarde explained how exposed the eurozone’s 19 economies are to the war in Ukraine, warning it was already damaging confidence and adding further disruption to global supply chains still recovering from the Covid pandemic.

The EU has a huge decision to make as any move to impose an embargo on gas imports from Russia could risk throwing Germany and the rest of the zone into recession.

Alastair George, Chief Investment Strategist of UK-based investment research and advisory firm Edison Group, warned: “The ECB is clearly in a tough place at present.

“Current eurozone inflation is well above target while all the signals are for a slowing of the economy in coming quarters, following a significant energy shock.

“A prolonged war in Ukraine is likely to hit the eurozone economy hardest of all developed regions.

“At the same time, the ECB is coming under criticism for moving too slowly to normalise interest rates.

“The euro has weakened today as ECB President Lagarde’s press conference comments focus on weak growth rather than elevated price pressures.

“The striking contrast between the US Fed’s ‘expeditious’ pace of interest rate normalisation and the ECB’s tentative steps is likely to maintain pressure on the euro versus the US dollar.”

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“How the economy develops will crucially depend on how the conflict evolves, on the impact of current sanctions and on possible further measures.

Since 2015, the ECB has bought nearly €5trillion (£4.1trillion) of public and private debt with the aim of rekindling inflation.

But inflation has unexpectedly skyrocketed recently and now stands at a record high of 7.5 percent.

This has left policymakers with a massive conundrum as they try to reconcile two opposing economic forces.

The Ukraine war has driven energy prices higher, draining household savings while corporate investment has dramatically slowed because of uncertainty caused by the conflict.

In addition, as normally seen during wars, banks have also been tightening access to credit, potentially worsening the crisis.



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