ECB pushes on with stimulus exit at Ukraine “watershed” moment By Reuters

© Reuters. FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank will end asset purchases in the third quarter, it said on Thursday, moving ahead with its exit from stimulus as soaring inflation outweighs concerns about the economic impact of Russia’s invasion of Ukraine.

With price growth in the euro zone at a record high even before Moscow began its assault on Feb. 24, the ECB’s more hawkish policymakers had been pushing for an early end to stimulus, paving the way for an interest rate hike this year.

While policy doves argued the war justified a pause for thought, February’s record 5.8% inflation rate and the prospect of an even higher reading in March intensified pressure on the bank to act in line with its inflation-busting mandate.

“The Russia-Ukraine 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,” ECB President Christine Lagarde told a news conference, calling the conflict a “watershed for Europe “.

“The risks to the economic outlook have increased substantially with the Russian invasion of Ukraine and are tilted to the downside,” she added, conceding that ECB policy-makers had aired differing views on what that meant.

But Lagarde said the waning impact of the coronavirus pandemic on the economy, improved labor market conditions and the prospect of an easing of supply chain bottlenecks all showed the euro area was in fundamentally healthy shape.

While the bank announced modest growth downgrades for this year and next, it ramped up inflation forecasts more strongly: from an earlier forecast of 3.2% to 5.1% for this year and from 1.8% to 2.1% for next year. By 2024, however, it saw inflation falling to 1.9%, in line with its 2% target.


The bank confirmed plans to wrap up its 1.85 trillion euro Pandemic Emergency Purchase Program at the end of the month and said purchases under the older and stricter Asset Purchase Program (APP) will be smaller than previously planned.

It now expects APP purchases to total 40 billion euros in April, 30 billion euros in May and 20 billion euros in June. Previously it had set purchases at 40 billion euros in the second quarter, 30 billion euros in the third quarter and 20 billion euros in the fourth quarter.

Bond buys in the third quarter will be “data-dependent” the ECB said, adding that the schedule could still be revised if the inflation outlook changes.

It said any adjustments in interest rates will take place “some time” after the end of asset purchases, a change from the previous formulation that purchases would end “shortly before” a rate move.

“Obviously ‘some time after’ is an open time horizon which is data dependent,” Lagarde said, when repeatedly asked what that meant for the timing of a first rate hike.

In a Reuters poll, nearly two-thirds of respondents said the APP would be shut down by end-September, with nearly half saying it would be in that month.

Yet the move still came as a surprise for many investors, who expected the ECB to make as few commitments as possible, keeping options open until there is more clarity about the war.

The euro quickly firmed on the decision, seen as a modest victory for conservative policymakers, and bond yields rallied.

Ten-year German yields rose about 7 basis points on the decision while the euro was trading at 1.108 versus 1.104 before the decision.

Markets now see around 43 basis points’ worth of interest rate hikes this year, up from around 30 basis points predicted before the meeting.

“All in all, today’s decisions are a good compromise, keeping maximum flexibility in a very gradual normalization of monetary policy,” ING economist Carsten Brzeski said. “A first rate hike before the end of the year is still possible.”

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