Francesco Canepa & Balazs Koanyi

FRANKFURT (Reuters). The European Central Bank’s policymakers met on Thursday in what might have been a crisis meeting. Russia’s invasion and occupation of Ukraine are likely to disrupt economic growth within the Euro zone, as well as complicate the ECB’s exit from negative interest rates.

The “informal meet-up” by the ECB was meant to help prepare a decision for March 10, on likely ending of the ECB’s bond-buying stimulus program. It will pave the way for the first rate increase in more than a decade, which should be used to combat surprisingly high inflation.

Russia’s overnight invasion of Ukraine has altered the situation by raising concerns about higher energy prices, financial instability, and lower trade with the euro area, which depends on Russian gas to 40%.

“In my view it is going to have a short-term inflationary effect – that is prices will increase due to higher energy costs,” ECB policymaker Yannis Stournaras told Reuters.

The Greek central banker said, “But I think that in the medium and long term, the consequences will be inflationary through adverse trading effects and of course by the rise in fuel prices.”

Stournaras was one of those ‘doves’ on the ECB’s Governing Council that favor a looser monetary policy stance. She suggested the central bank buy more bonds for at least another year, to offset the effect of conflict in Ukraine.

Bloomberg later reported that even his Austrian counterpart Robert Holzmann (known as a hawk) suggested that events in Ukraine could delay the ECB’s withdrawal from stimuli measures.

Isabel Schnabel is an ECB member and is also viewed as a hawk. She stated that the “shocks of war” have clouded economic prospects just as inflation was gaining ground in the Euro zone. This allowed the ECB’s stimulus measures to be withdrawn.

LIKELY to SLOW DOWN

Senior officials announced that the European Union will place new sanctions against Russia. They will freeze its assets and stop its banks from accessing European financial markets.

Before the exact extent of conflict and the subsequent economic sanctions became known, it was difficult to determine the economic impact. This could include the financial isolation of Russia due to its exclusion of SWIFT payments.

Analysts agreed that it was likely that the ECB would slow down its withdrawal of support measures.

Frederik Ducrozet (a Pictet strategist) said that it would make the ECB less cautious and delay its decision to taper bond purchases.

Chris Scicluna from Daiwa Capital Markets was the head of research and stated that the crisis would slow down normalization of (ECB Policy)

Carsten Brzeski from ING said that the ECB could not announce an end date on its Asset Purchase Programme until March 10, according to a report by ING.

NEW AGENDA

The meeting began with lunch, and will end around 10 pm (2100 GMT).

Although the ECB did not share a meeting agenda, policymakers were expected to discuss their economic outlook and future policy steps as well as operational issues.

The Ukraine crisis will likely be the dominant topic.

Carsten Brzeski of ING said, “This is now something totally different.” It removes the need for the ECB’s immediate action.

A spokesperson for the ECB stated that a comprehensive assessment of the economy’s outlook will be done at the March 10th meeting.

Despite heavy losses on the stock markets on Thursday, it was unlikely that the ECB would have to intervene to help the financial sector with euro zone banks being flush with cash but only slightly exposed to Ukraine.

The central bank can be tapped by Euro-zone banks for unrestricted liquidity and collateral, as part of a facility that was created in the aftermath of the financial crisis.

If the Ukraine conflict impacts economic activity in the euro area, lenders to the eurozone may be still in trouble.

Scope Ratings managing director Marco Troiano stated that while direct exposures may be limited, second-round effects can prove to be significant. For example, an increase in energy prices could have knock-on effects on the growth of Western Europe as well as on bank operating conditions.

The ECB’s top bank supervisor said earlier this month an exclusion of Russia from SWIFT would be “most impactful” https://www.bankingsupervision.europa.eu/press/speeches/date/2022/html/ssm.sp220210~b95041902b.en.html on euro zone banks and urged banks to prepare, including for the risk of cyber attacks associated with the geopolitical situation.

According to senior officials, cutting Russia out of SWIFT was unlikely at this point.