Stefano Rebaudo & Dhara Ranasinghe

LONDON, (Reuters) – Thursday’s European Central Bank meeting may be another tense moment in the lives of policymakers who are caught between record-high inflation and the economic impact from the conflict in Ukraine.

A few members of the ECB Governing Council, (GC), are calling for an earlier interest rate increase as some of central banks that have been most cautious change their tune in order to combat rising inflation.

Below are five questions that will help you understand the market.

1/ When will the ECB raise rates?

Many conservative policymakers are calling for an increase in the interest rate before year end. Markets predict that the -0.5% rate for deposits could rise in July.

The ECB is not making any promises and Christine Lagarde may be pressed about the timing. Rates in the United States rose in March while rates for Britain increased three times between December and January.

Ending bond purchases during the third quarter is a prerequisite for an ECB rate change. According to the ECB, any rate increase after that point will be made within a reasonable time.

Carsten Brzeski (ING global head of macro) stated that this meeting was crucial as it is difficult to discern the ECB’s primary message at present. It needs to provide more guidance.

GRAPHIC: Money markets bet ECB will raise rates fast (https://graphics.reuters.com/EUROPE-MARKETS/gdpzybkonvw/chart.png)

2. Can the hawks force a specific end date for bond buying?

Do not rule it out. Markets have been surprised by recent ECB actions, and there is increasing pressure after March’s headline inflation print of 7.5%.

In March, the ECB decided that asset purchases would be ended sometime during the third quarter. However, it did not make any further commitments on exiting stimulus. The minutes from the meeting reveal that a large group was keen to establish a definitive end date for asset purchases.

“The debates and positions regarding the GC will only become more entrenched in the inflation far exceeds (2%) its target but the flipside is that growth will be much weaker,” Nick Kounis said, ABN AMRO head of financial market research (AS).

GRAPHIC: ECB plans to end asset purchases in Q3 (https://fingfx.thomsonreuters.com/gfx/mkt/mopanborjva/ECBAprilAPP.PNG)

3. Does the ECB have a stance on inflation?

However, inflation has consistently underestimated prices over the past 12 months and concerns that it could be a problem are growing. The inflation rate is not expected to peak. The ECB may not be the only one to blame for slowing down in responding to soaring costs.

The ECB is likely to tighten its policies in order to reduce inflation. However, it could also hurt consumers who are already being affected by the rising cost of energy.

Philip Lane, Chief Economist at the ECB says that the bank should spend time analysing data.

Martin Wolburg, a senior economist at Generali Investments, stated that although the ECB may be a little behind, it is not too far. However, the Euro Area Economy is the epicenter of all the negative fallout from the war. A sharp growth slowdown could help to tame inflation.

GRAPHIC: Inflation is well above its 2% target (https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnmyxdvq/ECBAprilCPI.PNG)

4. Are there any signs of stagflation in the future?

Yes, say economists. While major economies struggle with high inflation rates, the eurozone is more vulnerable due to the conflict in Ukraine. The risks of low growth, high inflation or stagflation are increasing.

Germany’s economic council has more than doubled its 2022 growth projection to 1.8%. Euro area consumers are now in crisis. ECB Vice President Luis de Guindos expects second-quarter growth to hover around zero.

Lagarde, chief economist at the ECB says the ECB is not expecting war in Ukraine to cause stagflation.

GRAPHIC: Cracks widen in euro zone economy as war in Ukraine rages on (https://fingfx.thomsonreuters.com/gfx/mkt/myvmnqrbxpr/sentiment0804.PNG)

5. Are you worried about Russian energy being lost?

Russia is Europe’s main source of gas, accounting for 40%. Without Russia, Europe would need to import more gas from the spot market. Prices are approximately 500% higher than in 2021.

Germany activated already the first phase of its emergency plan for managing Russian gas supplies to prepare for disruptions and a halt.

Reinhard Cluse, UBS Investment Bank economist, expects that inflation will rise above 9% in a scenario where Russia’s energy supplies are cut 50%. This would make a possible recession.

The ECB might consider extending asset purchases or a new stimulus program if Russian gas is stopped completely. However, it seems likely that rate increases will be delayed.

GRAPHIC: Gas prices off peaks but still up over 50% this year (https://fingfx.thomsonreuters.com/gfx/mkt/klvykjlrwvg/ECBAprilGAS.PNG)