Market Moves Compound Risk of ECB Policy Error
The central bank’s newfound hawkishness has spooked financial markets.
The ECB better be careful how much it tightens monetary policy.
Photographer: Peter Dazeley/The Image Bank RFWith the world facing slower growth along with surging consumer prices, the risk of stagflation stalks the global economy. The danger is particularly acute in the euro zone, where national sovereignty has hobbled the fiscal response to both the pandemic and Russia’s invasion of Ukraine. And the European Central Bank’s newfound hawkishness threatens to provoke a market reaction that outguns official policy by tightening monetary conditions by more than the economy is able to withstand.
Rampant price increases in energy, food and other commodities have been exacerbated by the prospect of the war between Russia and Ukraine further dislocating global supply chains. Bloomberg’s News Trends function, which tallies the occurrences of keywords in articles from more than 1,500 sources, illustrates how stagflation is pinging the world’s radar.