It European Central BankAs it meets this week with an inflationary trend and a deteriorating economic outlook due to the Russia-Ukraine conflict, the task becomes more difficult.

Minutes from the ECB’s most recent meeting show that inflation reached 7.5% in March. This led to heated discussions among the Governing Council about how fast policy normalization should take place.

Dirk Schumacher from Natixis stated in a recent research paper that it was difficult to determine the pace of policy normalization in this current macro-economic climate.

“The key question for April is whether net purchases will end before then,” he said. He was referring to the massive bond purchases the ECB made to help stimulate the euro area economy and increase inflation. 

Schumacher said that Christine Lagarde (ECB President) could indicate that the Governing Council wants to end net purchases early in the third quarter. 

Once this bond buying has been completed, then the interest rate lift off can start — mirroring central banks in the U.K. and U.S.

Dutch central banker and renowned ECB hawk, Klaas Knot, said earlier in April that when the bank was back from its summer break, then “I don’t think we are currently in the position to exclude any possible scenario in respect of lift off … September, October, December — it could all be possible.”   

The economic outlook of the euro area has been severely impacted by the conflict in Ukraine and heavy Russian sanctions. Economic outlook has been impacted by high energy prices, supply chain bottlenecks, and concerns over a scarcity of many commodities. Inflation rates continue to rise and there are tentative indications that the surge in inflation is not just due to rising energy prices but also more long-lasting.

Lagarde, speaking at a conference in March 17, stated: “We are growing confident that inflation dynamics over medium term won’t return to the patterns we saw prior to the pandemic.”

We must manage any shocks that in the short-term push inflation over our target, and decrease growth.

On Thursday, the primary message will be keeping all options on the table. The meeting may also discuss a new instrument of policy, which could be activated in response to rising sovereign yields among euro-zone nations.

Holger Schmieding from Berenberg stated in a note that “the most contentious debate at the ECB might revolve around a possible new tool to prevent a hypothetical broadening of yield spreads, at a pace/or level that may be considered excessive by an ECB major.”

The spread is the difference between yields from two bonds of different countries in the Euro zone. In times of financial stress, market participants often use the spread between Italian or German yields to gauge their fear.