A Russian invasion of Ukraine or severe ratcheting up of sanctions would add as much as 2%-pts to inflation in DMs, particularly in Europe. Given the inflationary backdrop and hawkish signals from central banks, monetary policy could be tightened more aggressively as a result, although fiscal policy could be loosened to cushion the blow to real incomes. Over the longer term, whether Russia ends up invading or not, this geopolitical flare-up is likely to speed up the process of Russia’s decoupling from the West.
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