The war in Ukraine is impacting the global economy in various ways: higher commodity prices, international trade, financial markets as well as an increase in geopolitical uncertainty, which is a key channel of transmission. It influences decisions by households and companies because the full effect of the jump in oil and gas prices is not yet visible and because of concern about further increases in commodity prices. As a consequence, the relationship between the drivers of consumer spending and corporate investment and the decisions ultimately taken by households and companies changes and becomes more difficult to predict. This complicates matters for the Federal Reserve and the ECB: uncertainty weighs on the effectiveness of monetary transmission but higher commodity prices will cause an increase in inflation, which was already well above target. Geopolitical uncertainty will not stop the Federal Reserve from hiking its policy rate but we should expect an even greater insistence on the data-dependent nature of its decisions. The governing council of the ECB, which is meeting next week, will insist on the optionality of its policy. This means waiting to have a clearer picture before acting. Fiscal policy will again be called upon in the short run, to cushion the shock for households and business, whereas in the longer run, efforts will be stepped up to increase the strategic autonomy of the EU and also, like we have already seen in Germany, to increase defence spending. Fiscal consolidation and a reduction of budget deficits inevitably will be less of a priority.
