ECB Must Prepare for New Shocks, Including Russian Aggression

• European Central Bank policy fits the moment, and the economy has adapted well to volatility, but the bank must prepare for new shocks, possibly from Russia's military threat, ECB policymaker Gediminas Simkus noted.
• The ECB has achieved remarkable success last year, becoming the only major central bank to hit its inflation target, even as U.S. tariffs, war on the European Union's eastern border, Chinese goods dumping and food price surges kept uncertainty exceptionally high.
• Simkus argued political turbulence, which started with the pandemic in 2020 and also includes Russia's invasion of Ukraine, would likely persist and could easily upset the ECB's "good place" of inflation at target, growth at potential and interest rates in the neutral setting.
• Lithuania and fellow Baltic countries Estonia and Latvia, once part of the Soviet Union, have long expressed fears about possible Russian aggression, citing cyber-attacks, disinformation campaigns and incursions by drones and fighter jets. Simkus said the ECB should make sure cash distribution and payment systems are resilient to this sort of risk and that monetary policy is flexible enough.
• In the near term, the ECB's job is simple, Simkus argued, and policy will remain on hold at the next meeting on February 4, since small inflation fluctuations around 2% are normal. But there is little certainty beyond that, he cautioned.
• Financial markets see no interest rate change at all this year but anticipate some hikes next year on the premise that Germany's spending splurge will kick-start economic activity and its growth spurs the rest of the euro zone. Simkus, however, pushed back on the idea of giving signals beyond the immediate future.

(Source: Reuters)