How to escape stagflation?
European Central Bank's (ECB) March monetary policy meeting will be held on Thursday, March 10, while investors and market participants wait to see how policy markers going to avoid the block to enter stagflation. At its February meeting and unlike most expectations, we saw that ECB had a more hawkish tone which lifted the Euro, even though later with geopolitical tensions, it was one of the biggest losers.
While in the previous meeting, ECB President Lagarde mentioned that inflation risks are tilted to the upside, she did not rule out a rate hike in 2022, which has been ruled out with certainty several times in almost all meetings, this time, she must mention that what they are planning to do with higher inflation and reducing hopes for economic growth.
Expect the central bank to begin tightening monetary policy this year, but later and in the second half of 2022 could be likely, but as the Ukraine crisis poses downside risks to the economic growth with increasing inflation, beginning hawkish policies right now and in this meeting, could a high risk towards economic Downturn. Therefore holding the Deposit Rate unchanged at -0.50%, and tapering of bond purchases at the same amount could be the prudent decision.
At the same time, the Ukraine-Russia tensions lifted the oil and gas prices towards new levels, as western sanctions on Russia increased. This situation makes the ECB’s job harder, as energy prices have pushed eurozone inflation to a record high of 5.8%, and this inflation will put the policymakers at the put at a crossroads where to go, accepting slower growth with higher inflation or lower inflation, but an imposed recession.
My conclusion for this meeting is to wait and see policy, which will be positive for the European stock markets, but not the Euro!
