ECB Warns Of Substantial Risk To Outlook Due To War

(RTTNews) - The European Central Bank raised sharply the inflation forecast for this year for the euro area and warned that economic activity would be dampened if there would be severe impact from the Russia-Ukraine war.

In the latest ECB staff macroeconomic projections unveiled by ECB President Christine Lagarde on Thursday, the inflation outlook for this year was lifted to 5.1 percent from 3.2 percent.

The projection for next year was raised to 2.1 percent from 1.8 percent. The outlook for 2024 was also lifted to 1.9 percent from 1.8 percent.

In the alternative scenarios for the impact of the war, the bank said economic activity could be dampened significantly by a steeper rise in energy and commodity prices and a more severe drag on trade and sentiment.

"However, in all scenarios, inflation is still expected to decrease progressively and settle at levels around our two per cent inflation target in 2024," Lagarde said in her introductory statement to the post-decision press conference.

While the impact of the coronavirus pandemic seems to be fading and there are signs of easing in supply bottlenecks and improvement in the labor market, the bank said euro area growth forecasts have been revised down owing to the Russian invasion of Ukraine.

The bank expects food and energy prices to climb further due to the war.

The Eurozone growth forecast for this year was lowered to 3.2 percent from 4.2 percent. The outlook for next year was cut to 2.8 percent from 2.9 percent. The projection for 2024 was retained at 1.6 percent.

"The risks to the economic outlook have increased substantially with the Russian invasion of Ukraine and are tilted to the downside," the bank said.

"The same factors are risks to the outlook for inflation, which are on the upside in the near term."

Earlier on Thursday, the bank unveiled a plan to wind down monetary stimulus, which economists said was gradual and hawkish.

However, the bank altered its forward guidance and signaled it would wait some time after ending asset purchases before raising interest rates.