The European Central Bank (ECB) sharply raised its inflation forecasts on Thursday, while lowering those for GDP growth, for the years 2022 and 2023 in the euro zone, due to the war in Ukraine which will “continue to weigh on the economy”.
For the euro zone, the institution now expects inflation of 6.8% in 2022, which should then settle down to 3.5% in 2023, and remain at 2.1% in 2024, still above its 2% target, according to new ECB forecasts published in a press release following a monetary policy meeting.
In March, in its latest forecasts, the ECB forecast a price increase of 5.1% in 2022, 2.1% in 2023 and 1.9% in 2024.
First rate hike confirmed for July
To deal with this abnormally high inflation in the euro zone, the institution announced the first rate hike in more than ten years, scheduled for July.
GDP growth should reach 2.8% in 2022 in the euro zone and slow down to 2.1% in 2023, compared to 3.7% and 2.8% respectively during the last forecasts in March.
Russia’s unwarranted aggression in Ukraine continues to weigh on the economy in Europe as inflationary pressures have widened and intensified, the institution said.
The ECB cites soaring energy and food prices, particularly due to the impact of war, to explain this phenomenon.
The war in Ukraine has raised energy prices since February, with Russia being one of the main suppliers of hydrocarbons to the EU. Food prices have also soared, as Russia and Ukraine are among the world’s leading wheat exporters.
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While inflation is expected to remain abnormally high for some time, moderating energy costs, easing pandemic-related supply disruptions and monetary policy normalization should lead to a decline, ECB adds .
Once the current headwinds subside, economic activity should pick up, she added.
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