The current economic situation Before the war, the world economy was on a path of gradual recovery, following the most acute phase of the pandemic, although the recovery was already flagging from the second half of 2021 owing to global bottlenecks and the increase in inflationary pressures. The gradual path of recovery in activity prior to the Russian invasion of Ukraine was, in any case, highly uneven across geographical areas and sectors of activity. Thus, while some economies had already regained or even surpassed their pre-crisis levels of activity, others had not. Spain, despite having one of the highest levels of vaccination in the world, was among the latter. At the end of 2021, Spain’s output was still 3.8 percentage points (pp) below its pre-pandemic levels, while in the euro area as a whole this gap had already closed. One factor that would explain the difference in progress is the sectoral composition of activity. In particular, the recovery tends to be more delayed in those countries, like Spain, in which services that are highly dependent on personal interaction, such as those linked to tourism, account for a large share of the economy. Economic developments in Spain, and in the rest of the world, have been affected by upward inflation surprises since the second half of 2021, driven in particular by energy and food, although there has also been a slight rise in underlying inflation. Between December 2020 and March 2022, the annual increase in consumer prices rose from -0.6% to 9.8%.

The European Central Bank’s monetary policy Against the recent backdrop of high inflationary pressures, the European Central Bank (ECB) has continued with the normalisation of its monetary policy initiated last December. The Governing Council has explicitly expressed its willingness to maintain optionality, gradualism and flexibility in the conduct of monetary policy going forward. In the current climate of uncertainty, this is deemed necessary to allow us to respond to  incoming data to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability. Indeed, the war in Ukraine is increasing the short-term upward inflationary dynamics, adding to the pressures generated by rising energy prices, bottlenecks and the normalisation of demand. The intensification and prolongation of these short-term inflationary pressures make it more likely that second-round effects will emerge and, therefore, that the inflation dynamics will become entrenched in the medium term. However, the war is having an adverse effect on economic growth, which could potentially be significant, particularly in the short term, in a setting where euro area GDP remains below its potential level. Overall, the upside risks to the inflation outlook have intensified, particularly in the near term. Although various indicators of long-term inflation expectations drawn from financial markets and surveys of professional forecasters put inflation at around 2%, there are preliminary signs, which will have to be monitored carefully, of those indicators being revised to above-target levels. In step with the normalisation of monetary policy, net purchases under the pandemic emergency purchase programme (PEPP) were discontinued on 31 March.