Last month European Central Bank policymakers agreed to express readiness to raise interest rates as inflation has shown signs of becoming increasingly difficult to curb.
The ECB has also been preparing to reduce monetary stimulus gradually, coupled with Russia’s move to attack Ukraine last week. With the EU dependent on oil and exports has prompted policymakers to rethink their plans to take more proactive action ahead of key policy decisions on 10 March.
ECB President Christine Lagarde previously reiterated a pledge not to raise rates at the February 3 meeting. The ECB has said it needs to look at sustainable inflation at 2% before raising its rate on bank deposits, which is currently set at negative 0.5%.
"It is widely shared that focusing on the ECB's medium -term inflation target is no longer a difficult prospect, thus making the fulfillment of the forward guidance criteria (for rate hikes) more likely in the shorter term," the ECB said.
Some policymakers even want to end the Asset Purchase Program (APP) which will pave the way for rate hikes.
The ECB's dilemma is clear. Eurozone inflation soared to a record high of 5.8% last month, nearly three times the bank’s target. The labor market also tightened faster than projected, indicating that wage pressures will soon begin, exacerbating the ECB’s inflation problems. So it is not surprising that most drafters called for an increase in rates.
High cost of goods will reduce consumer spending power and burden investment. All this will hamper growth and affect prices in the medium term. The next meeting will be an important early moment to see indications of the ECB’s direction.