ECB confirms intention to end bond purchases in Q3

The European Central Bank today stuck to its plan to permanently end its stimulus program in the third quarter but gave no further indication of its timing, underscoring uncertainties related to the war in Ukraine.

The noncommittal tone of his statement pushed eurozone bond yields and the single currency lower as markets reduced expectations for the scale of rate hikes later this year.

“We will maintain the optional character, the gradual character and the flexibility in the conduct of our monetary policy,” ECB President Christine Lagarde told an online press conference.

The President of the ECB was talking about her home where she is recovering from Covid-19.

Christine Lagarde said the conclusion of the asset purchases could come any time in the third quarter and insisted that there was no specific timetable for when rates would then start to rise, adding that it could be weeks or even months after the stimulus ends.

“We’ll deal with interest rates when we get there,” she insisted.

Among the world’s most cautious central banks, the ECB is already well behind nearly all of its major peers, many of which began raising rates last year.

In the past two days alone, the central banks of Canada, South Korea and New Zealand have all raised the cost of borrowing.

The U.S. Federal Reserve, meanwhile, is expected to hike rates eight or more times over the next two years, leading the world to policy tightening.

Ms Lagarde highlighted how exposed the 19 eurozone economies were to the Ukraine conflict, saying it was already damaging confidence and further disrupting global supply chains already affected by the pandemic.

“The development of the economy will crucially depend on the evolution of the conflict, the impact of current sanctions and possible additional measures,” she said.

In particular, any move by the European Union to impose an embargo on gas imports from Russia is seen as likely to plunge Germany and the rest of the area into recession.

The ECB has bought nearly 5 trillion euros in public and private debt since 2015, all in an effort to rekindle inflation, which has been below the bank‘s 2% target for years after the bloc debt crisis.

But inflation has risen unexpectedly in recent months, leaving policymakers with a dilemma as they try to reconcile two opposing economic forces.

On the one hand, inflation is already at a record high of 7.5%, and further increases are expected. On the other hand, the eurozone economy is now stagnating at best, with the impact of war affecting households and businesses in its 19 countries.

Ahead of today’s meeting, a host of conservative policymakers, including central bank governors from Germany, the Netherlands, Austria and Belgium, all argued for a rate hike, fearing that high inflation persists too long.

Adding to their hawkish argument, longer-term inflation expectations – a key indicator of policy credibility – have come well above the ECB’s 2% target, although wages have yet to respond. to rising prices.

Energy prices, pushed up by the war in Ukraine, are draining household savings and the uncertainty caused by the conflict is dampening business investment. Banks also tighten access to credit, as they naturally do during wars, potentially deepening the recession.

Political doves, on the other hand, argue that most inflation is the result of external supply shocks, so inflation will naturally decline over time.

They note that high energy prices tend to be deflationary in the longer term as they dampen growth, hence the risk that eurozone inflation will fall too low.

At its meeting today, the ECB kept interest rates at historically low levels, with the rate on its main refinancing operations remaining at zero, its marginal lending facility at 0.25% and its rate bank deposit at -0.5%.