FRANKFURT — The European Central Bank is set for a cautious approach with its monetary policy meeting this week as Russia’s invasion of Ukraine impacts, and potentially derails, many of the policy plans it had for the rest of the year.

Two weeks ago, President Vladimir Putin launched an unprovoked attack upon Russia’s neighbour. This Thursday meeting ends. It has been a dramatic change in the financial market. The oil and gas prices are on the rise and European bank shares lost more than their gains in the past year. 

It is clear that the future situation will be unpredictable. However, one thing is certain. Inflation will increase and the supply issue and higher commodity prices will have an impact on growth. 

The ECB has decided to wait and see what happens in the face of this background. 

Dirk Schumacher (ECB observer with Natixis) stated that “Energy prices will rise and inflation will push higher while growth will slow down.” In a note sent to clients, Schumacher said. 

It is not clear at this time how serious this’stagflationary’ shock will prove to be. We expect the ECB’s March meeting to take a waiting and seeing stance.”

Stagflation refers to an economy experiencing both stagnant activity but also accelerating inflation. When oil shocks led to a prolonged period of high prices and sharply declining GDP growth, this phenomenon was first observed in 1970s.

As a result of Russia’s severe military escalation, the Euro zone saw an inflation rate of 5.1% in January. It climbed to 5.8% by February. Inflation is expected to worsen as gas prices soar to historical highs. Putin has threatened to halt gas supplies as a result of Western sanctions against Moscow.

The ECB has one advantage over the U.S. Fed. Holger Schmieding from Berenberg stated in a note that worsening inflation in the Eurozone was caused only by external shocks to the supply. This is not a factor the ECB could control.

“ECB Council members have the option to postpone major decisions for a better outlook.”

Although the jury is yet to be decided on how the war on terror will affect the economy of the Euro zone, there are signs early that the supply chain problems will become more severe, which will impact production in particular.

Reuters polls show that most economists expect a hike in interest rates to begin within the next few months. There is no agreement on when the ECB will end the Asset Purchase Programme (or APP).

As there is a lack of clarity and uncertainty in these uncertain times, “Optionality”, will be the buzzword for the ECB press conference Thursday afternoon.

—CNBC’s Weizhen Tan contributed to this article.