As the military operation in Ukraine intensifies, energy prices are soaring and shaking Europe's economic stability.

Policymakers are debating how to reduce inflation without jeopardizing economic recovery.

Christine Lagarde, the European central bank President, told reporters on Thursday that the war “will have a material impact on economic activity and inflation, through higher energy and commodity prices, the disruption of international commerce, and weaker confidence."

She added that the risks have greatly increased, while the bank tries to keep all its options open for the future.

However, in the face of increasing inflation, which is nearly above the central bank's objective of 2%, officials announced on Thursday that they want to halt its pandemic-era 1.85 trillion-euro ($2.05 trillion) bond-buying program at the end of this month. It also stated that it intends to discontinue its older bond-buying program in the third quarter and make fewer purchases altogether if the inflation outlook does not deteriorate. The older program did not have a specified termination date under a previous timetable.

Related News

Former EU diplomats urge Europe to suspend cooperation with 'Israel'

Norway to join EU if trade deal with 'Israel' is suspended

Lagarde described the crisis as a "Watershed for Europe." With the central bank cutting its forecast for economic growth this year to 3.7 percent from 4.2 percent as a result of the crisis, it has considered other outcomes, including a more severe drag on trade and consumer sentiment. All predictions led to the 2 percent target in 2004.

Read more: US, EU sanctions on Russia impact gas, oil, currency & more
 

Last month, the eurozone's annual inflation rate increased to 5.8 percent, up from 5.1 percent the previous month. On Thursday, the central bank raised its inflation forecast for the next three years, forecasting 5.1 percent annual inflation in 2022, up from 3.2 percent three months ago. Inflation is predicted to hit 2.1 percent in 2023, slightly higher than the central bank's target of 1.9 percent, and to remain at that level in 2024.

“We recognize that there is huge uncertainty and that things can go in all sorts of directions, and we want to be able to respond to those circumstances,” according to Lagarde. 

The bank held interest rates steady, stating that any rate increases would take place "sometime after" the termination of net purchases under the Asset Purchase Program and would be gradual. The bank eliminated prior phrasing in its statement that suggested interest rates may fall.

Global ramifications

Russia's special military operation in Ukraine has had global ramifications like the spike of oil prices, gas supplies, food prices, and shortages of essential metals.

Former US colonel and Eurasia Center Vice President, Earl Rasmussen, said that the European Union's latest sanctions and economic retaliation against Russia will backfire and cause a massive recession in Europe. 

British Petroleum will also be dumping its stake in Rosneft, a Russian petroleum company. Dutch oil company Shell also said that it will be backing out of joint ventures with Gazprom and Gazprom Neft, including the Sakhalin II project while also canceling its involvement in the Nord Stream 2 pipeline. Nord Stream 2 has recently had its license revoked by Germany.