The Russian invasion of Ukraine will have a material impact on economic activity and inflation through higher energy and commodity prices, the disruption of international commerce and weaker confidence. The extent of these effects will depend on how the conflict evolves, on the impact of current sanctions and on possible further measures.
The impact of the war has to be assessed in the context of solid underlying conditions for the euro area economy, helped by ample policy support. The recovery of the economy is being boosted by the fading impact of the Omicron variant of the coronavirus (COVID-19). Supply bottlenecks have been showing some signs of easing and the labour market has been improving further. In the baseline of the March 2022 ECB staff macroeconomic projections, which incorporate a first assessment of the implications of the war in Ukraine, GDP growth has been revised downwards for the near term owing to the conflict.
Inflation has continued to surprise on the upside because of unexpectedly high energy costs. Price rises have also become more broadly based. The baseline for inflation in the new staff projections has been revised upwards significantly.
Longer-term inflation expectations across a range of measures have re-anchored at the ECB's inflation target. The Governing Council sees it as increasingly likely that inflation will stabilise at its 2% target over the medium term.
In alternative scenarios for the economic and financial impact of the war, economic activity could be dampened significantly by a steeper rise in energy and commodity prices and a more severe drag on trade and sentiment. Inflation could be considerably higher in the near term. However, in all scenarios, inflation is still expected to decrease progressively and settle at levels around the 2% inflation target in 2024.
Based on its updated assessment of the inflation outlook and taking into account the uncertain environment, the Governing Council has revised the purchase schedule for its asset purchase programme (APP) for the coming months. Monthly net purchases under the APP will amount to €40 billion in April, €30 billion in May and €20 billion in June. The calibration of net purchases for the third quarter will be data-dependent and will reflect the Governing Council's evolving assessment of the outlook. If the incoming data support the expectation that the medium-term inflation outlook will not weaken, even after the end of its net asset purchases, the Governing Council will conclude net purchases under the APP in the third quarter. If the medium-term inflation outlook changes and financing conditions become inconsistent with further progress towards the 2% target, the Governing Council stands ready to revise its schedule for net asset purchases in terms of size and/or duration. Any adjustments to the key ECB interest rates will take place some time after the end of net purchases under the APP and will be gradual. The path for the key ECB interest rates will continue to be determined by the Governing Council's forward guidance and by its strategic commitment to stabilising inflation at 2% over the medium term. Accordingly, the Governing Council expects the key ECB interest rates to remain at their present levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term. The Governing Council also confirmed its other policy measures.
