Jonathan Cable and Swathi Nair

BENGALURU/LONDON – European Central Bank won’t raise its interest rates until the end of 2012. Fewer economists surveyed by Reuters after Russia invaded Ukraine expect an earlier rise.

This is despite the fact that inflation in the eurozone reached 5.8% last February, despite the central bank’s expectations of a decrease.

Six economists predicted the rise in inflation would occur sooner than expected, in the third quarter. This is down from sixteen who were polled last month.

Out of the 45 people who predicted that the deposit rate would rise this year from its record low at -0.50%, 18, nine, and six others saw it at –0.25%.

The central bank is facing communication challenges at its March 10 policy conference because of this fragmented view.

The expectations regarding ECB rate rises are in sharp contrast to other large central banks which may have given several increases by the year-end. In its two previous meetings, the Bank of England raised rates twice.

As with other economies, the Omicron-type pandemic has been relatively mild for the eurozone and it is currently in full recovery. The euro zone’s unemployment rate is at an all-time low. Its economy, however is more susceptible to the violence on the continent.

The war didn’t change the hard combination of growth and inflation risks. It has only made it worse. In this light, the war should not change the ECB’s plan to withdraw some accommodative policy gradually and cautiously,” said Rabobank economists.

“The near-term uncertainty is what has changed.” These changes may lead to a temporary delay by the ECB in normalization, but – critically – not a total stop.

It was unclear whether the ECB would stop its Asset Purchase Programme in March. The central bank currently purchases 20 billion euro worth bonds per month. It is expected to continue even after the separate pandemic programme in March.

In the second quarter, these bond purchases will double. Nearly three quarters of the respondents believed that the APP could be shut down by September’s end. Half said it would happen in September. It would close by the end of year according to all but one economist.

In the interim, higher energy costs and additional disruptions to supply chain chains following the Russian invasion will likely keep inflation high for much longer.

With the ECB not likely to raise rates before the end of the year and as the Ukraine conflict intensified, euro was below $1.10 on Friday. This raised the possibility that there will be additional inflation pressure from imported sources.

Carsten Brzeski from ING’s global macro head Carsten Brzeski stated, “War has raised the likelihood of a stagflation situation for the eurozone, where you will experience a stagnating and much higher inflation on the back of high fuel prices.”

The concern is that we could see an increase in the economy of the Euro zone from both ends. Supply side: It could impact production by supply chain disruptions. Demand side: Higher energy prices and lower purchasing powers will cause it to affect both supply and demand.

For the ninth consecutive year, inflation forecasts have risen to 5.4% in the second and third quarters respectively. This is more than twice the ECB target of 2.0%.

It was predicted that the bloc would experience a 1.0% increase in economic growth next quarter. Then, it will slow down to 0.8% and 0.6% for the third and fourth quarters. It is down from the 1.2%, 1.0% and 0.7% forecasts just weeks ago.

From 3.9% to 2.5% last month, the annual growth was 3.8% and 2.5% respectively.

(For additional stories about the Reuters global economy poll, click here