Europe’s economy is said to be facing severe impacts from war and inflation.


Concerns about the future of the economy are particularly acute in Germany, Europe’s largest economy, due to its heavy reliance on Russian energy. At the end of last month, economic advisers to the German government said the outlook had deteriorated “sharply” due to the war, with an increased risk of recession looming alongside high rates of inflation.

Still, pressure is mounting on the central bank to take more action against inflation, and traders are betting that interest rates will rise before the end of the year. This month, after eurozone inflation data came in stronger than expected, Joachim Nagel, president of Germany’s Bundesbank, said monetary policy “shouldn’t let the opportunity pass appropriate countermeasures”.

At the European Central Bank meeting in March, policymakers said they would seek to end the bank’s bond-buying program in the third quarter, a precondition for raising interest rates. Thursday, the bank reinforced this intention.

Interest rates will rise “some time after” the expansion of bond purchases stops, which could take weeks or months, Ms Lagarde said. And the increases will be gradual.

“The ECB’s hesitant stance despite high inflation is risky,” Jörg Krämer, chief economist at Commerzbank in Frankfurt, wrote in a note to clients. “Inflation expectations, and therefore inflation, can rise even if the economy is performing poorly.”

Krämer expects the central bank to start raising interest rates in the third quarter, as long as there is no energy crisis or recession, which could be triggered by an oil and gas embargo on imports from Russia.

The euro fell about 1% to a two-year low against the US dollar during Ms. Lagarde’s press conference.

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