The Russia-Ukraine war offers entrepreneurs, company leaders, and policymakers a new challenge regarding its economic impact. Covid-19 had already disrupted the global economy two years before the war, and economies, especially in emerging countries, were beginning to recover. With the war causing supply and price shocks, most countries having close trade ties with Russia or Ukraine had their economic gains after Covid-19 was erased. Although production and consumption were interrupted, war can be the beginning of self-sufficiency in most countries through creating new reliable supply chains, especially in the case of the E.U., which relies heavily on Russian oil, even though the latter is under global red light. Pressure on the E.U. by the West to cut Russian trade ties is a challenge to most E.U. countries as that would mean high energy costs, among other items that would be in demand. The E.U. is already being hit with high energy costs and a shortage of various metal supplies from Russia (Prohorovs, 2022). One of the global oil and gas analytic agencies Rystad Energy, states that the global LNG demand for 2022 is 436 million tonnes, and the supply is currently at 410 million tonnes. A country like Austria, which gets 80% of its gas from Russia, risks a severe economic recession if it were to cut ties with Russia. Rystad Energy forecasts that it cannot cover all the demand; gas will rise from 1000 to 3500 cubic metres in the upcoming year (Prohorovs, 2022).

The supply shock caused by the war raised oil and food prices, reducing economic growth and increasing inflation. Black-Rock investment company forecasts that the E.U. countries will lose at least 9% of their GDP due to the war. One of the strongest economies in Europe, Germany, was also affected by the war and energy prices as the Industrial Production Price Growth index March 2022 was 30.9% and April 33.5% (Prohorovs, 2022). The war subsequently slowed down labour markets, especially in neighbouring countries; other countries, such as Moldova economies, were hit by migration and sanctions, which disrupted resource channels and disruption of supply chains. Central Bank of Ireland economist Reamann Lydan states that 21 countries in Europe experienced slow growth immediately after the war commenced. Inflation hit employment the hardest as Russian imports reduced and energy-dependent sectors slowed down (Prohorovs, 2022). Therefore, the inflation impact will depend on the Countries’ connection to Russia and Ukraine and their economic capability. Generally, the inflation triggered by the war will continue to cause economic uncertainty, proving a difficult task for Central Banks.

The Russian-Ukraine war is continuing to push inflation rates through the ceiling. According to researchers, the high inflation rates have hit a two-long decade low as inflation quickly spreads to housing and other sections. These high rates of interest inflation were a possible risk of a permanent change in inflation expectations which would mean a loss of credibility for Central Banks. Henceforth, now more than ever, Central Banks have no wiggle room to get it wrong. The monetary policies they come up with have to be just right while avoiding disruptive economic adjustments in the long run. The Federal Reserve, Bank of England, and Bank of Canada have already continued to raise interest. Also, the European Central Bank (ECB) increased point rates by at least half while adopting the Transmission Protective Investment. With these monetary policies now in the spotlight more than ever, it is a chance to prove how strong they are, especially when not backed by fiscal policies to control inflation. However, the federal government made projections that show positive long-term signs. The measures adopted by Central Banks would lead to an increment of real interest on government bonds and negative short-term rates. However, the model would readjust, and in 10 years, the real rate forward curve covers positive inflation rates which an expansion range of ½% to 1%. According to (cite IMF), Central Banks should approach the application of countermeasures slowly for a more permanent solution with little economic backlash. However, a stern, precise anchor on inflation would later be set up to help restore policy credibility as the financial markets and the economy readjusts. However, a fast policy rate would lead to a decline in equity, credit risk assets, and market assets. The financial market would be unstable, while emerging markets would suffer the brunt of this approach. The Central Banks, at all costs, cannot lose credibility by allowing the expectation of inflation to soar. In consumer studies in places like the U.S. and Germany, it is already evident that people are aware of the inflation rates and believe that the expected inflation rates will continue to rise even in 2023 (Adrian et al., 2022).

Kilian and Zhou (2022)