The accounts of ECB’s March 9-10 meeting noted that “while the Russian invasion of Ukraine had increased uncertainty surrounding the macroeconomic outlook, related risks to the inflation outlook were seen as largely one-sided, with experience suggesting that wars tended to be inflationary”.

“While the war would likely dent economic growth in the short term, annual growth was projected to remain positive even in the severe scenario, pointing to ‘slowflation’ rather than stagflation.”

“The greater persistence of inflation increased the probability of second-round effects via strengthening wage dynamics…. a longer period of above-target inflation would lead to an increased risk of an upward unanchoring of longer-term inflation expectations.”

Thus, the Governing Council could “no longer afford to look through higher inflation, even if it was driven by an adverse supply shock.”

ECB decided at the meeting to revise the plan for APP net purchases, with the option to end after June. “Easing bias” was removed from the forward guidance. Interest rate hike would come “shorter” after ending the net purchases, depending on incoming data.

Full accounts here.

ECB Executive Board member Fabio Panetta said in a speech that the high inflation in Eurozone is “mostly due to global factors – including the increase in the prices of oil, gas and other commodities – over which monetary policy has little leverage.” And it “does not fundamentally result from an economy that is running above potential”.

Therefore, “asking monetary policy alone to bring down short-term inflation while inflation expectations remain well anchored would be extremely costly”. Monetary tightening would not affected imported energy and food prices, but “massively suppress domestic demand to bring down inflation”.

“And with the current levels of imported inflation, in order to hold headline inflation to 2%, we would need domestic inflation to be deeply negative. In other words, we would induce domestic deflation,” he added.

Panetta suggested that “fiscal policy can help mitigate the challenge of higher inflation by containing the effects of higher energy prices”. On the other hand, “Monetary policy will play its role, adjusting policy in line with the medium-term inflation outlook. ”

Full speech here.

ECB Vice President Luis de Guindos said in a speech, “for the euro area, the financial stability impact of the war has so far been relatively contained.” And, “markets have generally been functioning well”, with “no dash for cash”.

“While both banks and non-banks have been affected – especially the few that have large direct exposures to Russia and Ukraine – the economic fallout has not had a sizeable impact on the EU banking or financial systems as a whole,” he added.

But he also noted, “the invasion of Ukraine also demonstrated how vulnerable Europe is due to its high dependency on fossil fuel imports from Russia. Speeding up the green transition is a key priority from this perspective too – not only to address the urgent environmental and climate challenges we face, but also to help increase our energy security and protect the EU economy from energy price spikes.”

Full speech here.

ECB Chief Economist Philip Lane said in an interview with Antenna TV, there are three concerns about the Russian invasion of Ukraine, from view point of the economy, including energy, trade and uncertainty. “The war is a major negative economic issue, but the reopening of the economy gives some momentum. So this year, for example, we should expect the tourist season to be better than last year,” he said.

Lane expected that inflation might peak by “mid-year” but that depends on the war. “Most likely, with the nature of the energy shock, prices will either level off at these high prices or will start to decline”, he added. “But the momentum of inflation will slow down, so we do think that in the second half to the year, as you say, the inflation rate will come down.”

He also emphasized, “unlike the 1970s, these are a few months of high inflation rates. It is not a decade of high inflation rates, and we do think the inflation will fall later this year. So please remember: this inflation is coming from outside, it is not coming from the European economy. This is why we do think it has this special characteristic.”

Full interview here.