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Will the Ukraine crisis alter the ECB’s monetary policy stance?

Russian invasion creates a dilemma for the ECB

Christine Lagarde, the president of the European Central Bank, will have her first chance to outline how seriously Russia’s invasion of Ukraine has upended the outlook for the eurozone economy when she presents new forecasts on Thursday.

The ECB is widely expected to postpone any major policy decisions when its governing council meets in Frankfurt this week, preferring to maintain as much flexibility as possible while assessing the economic fallout from the war in Ukraine.

The crisis creates a dilemma for the ECB. While on the one hand economists have slashed their growth forecasts for the euro area this year and expect the ECB to do the same, the disruption to the supply of energy and other commodities is expected to drive up inflation.

Consumer prices are already rising at their fastest rate in the 22-year history of the single currency — jumping 5.8 per cent in the year to February — and most economists expect it to remain well above the ECB’s 2 per cent target at least for the rest of this year.

“The invasion of Ukraine has dramatically complicated the picture further for the ECB: energy prices and inflation will be pushed higher, while growth will weaken,” said Dirk Schumacher, head of European macro research at Natixis.

He predicted Lagarde would take a “neutral stance” on the potential of the ECB raising interest rates this year, neither signalling that it was likely nor ruling it out.

UBS economist Reinhard Cluse said he did not expect the ECB to shift to an “outright dovish” position and predicted it would keep its inflation forecast for the next two years slightly below its 2 per cent target, allowing the central bank to maintain its generous stimulus for at least a few more months. Martin Arnold

Did US inflation continue rising in February?

US inflation is expected to have accelerated further in February, according to forecasts compiled ahead of Thursday’s report on consumer prices.

Led by higher energy costs, economists polled by Reuters forecast that the consumer price index rose by 7.9 per cent in the 12 months to February — the highest rate since the early 1980s. It registered 7.5 per cent in January.

The rising cost of heating oil and gasoline, which has been exacerbated by the conflict in Ukraine, is expected to have driven energy prices up 4.7 per cent, according to Barclays analysts.

Rents are also projected to have increased, in pace with the prior month. The rise in food prices is expected to have slowed slightly, but could pick up again in the coming months as people return to restaurants following the Omicron coronavirus wave.

Still, the inflation report is forecast to show that some consumer prices have moderated — most notably in new and used cars. The Manheim Used Vehicles Value index, a leading indicator of used car prices, fell in February for the first time in six months.

Yet none of this is expected to change the Federal Reserve’s course of action at its March meeting. The US central bank is still forecast to raise interest rates by 0.25 percentage points for the first time since cutting its key rate to zero at the beginning of the pandemic. Kate Duguid

Which companies are exposed to the economic fallout of the war in Ukraine?

European banks, brewers and car manufacturers with exposure to Russia and Ukraine are among the companies to have tumbled in value since Moscow invaded its neighbouring country.

Shares in Renault, which owns Russia’s biggest car company Avtovaz, have dropped by more than a quarter since the close of trade on February 23.

Meanwhile, Austrian bank Raiffeisen — whose Russian business has €22.9bn of assets — has shed more than two-fifths of its market value over the same timeframe. France’s Société Générale, another bank with substantial operations in Russia, has fallen by a third.

In the brewing sector, Denmark’s Carlsberg, which this week halted production at its three Ukrainian breweries and whose Baltika brand accounts for roughly a quarter of Russia’s beer market, has slumped 15.5 per cent.

Declines have also extended to the energy sector. Shares of the Finnish state-owned group Fortum — which said it would stop all new investment projects in Russia — have fallen more than a quarter since Russian President Vladimir Putin ordered the full-scale invasion of Ukraine.

European equities have dropped broadly in recent days, but their declines have proved less severe in relative terms. An MSCI gauge tracking European stocks, priced in dollars, is down by a tenth since February 23. George Steer

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