The ECB left its base interest rate unchanged at the lowest level. Since March 2016, it has been at zero. EU finance ministers have agreed to slightly tighten fiscal policy next year, after three years of injecting billions into the economy due to the coronavirus pandemic. They also said they will prepare more cash if the situation in Ukraine makes it necessary.
EUR/USD reacted weakly to this news, but during the US session underwent a decline amid increased demand for dollar.
Although all EU ministers said the eurozone economy is in good shape, uncertainty has increased significantly. The economic implications of the conflict in Ukraine are yet to be determined, increasing the risks associated with continued problems in the supply chain, fairly high energy prices and inflation, which remains at a high level for much longer than expected.
On March 2, the European Commission recommended that EU governments shift from a supportive stance to a neutral stance next year, as the economy is growing and EU countries have large debts as a result of the pandemic. But they also said governments should be ready to quickly return to supporting the economy with public money, depending on what problems the geopolitical situation in Ukraine will bring.
The potential policy change will be facilitated by the fact that EU government borrowing restrictions are likely to remain suspended in 2023 due to the uncertainty caused by the situation in Ukraine. Ministers agreed that countries with high levels of debt, such as Italy or Greece, should focus on reducing it, while countries with low levels of debt should focus more on investment.
In terms of inflation, the ECB projected that it will reach an average of 5.1%, despite the economy growing 0.5% slower due to geopolitical tensions. But in 2023, it will drop to 2.1%.
The European Commission will publish its own updated economic forecasts in May.
