The European Central Bank faces a difficult balancing act, with inflation hitting record highs while the war in Ukraine casts a shadow over growth prospects.
Thomas Lohnes | Getty Images News | Getty Images
The European Central Bank kept its monetary policy unchanged on Thursday, but confirmed that it would end its bond purchases in the third quarter.
The Governing Council faces a dilemma, with inflation hitting a record high of 7.5% in March, while prospects for economic growth weaken due to the war in Ukraine.
The ECB said in a statement on Thursday that it now expects to conclude its net asset purchases under its APP (asset purchase programme) in the third quarter. He previously said that would be the course of action if supported by the data.
“At today’s meeting, the Board of Governors considered that incoming data since its last meeting reinforces its expectation that net asset purchases under the APP are expected to be completed in the third quarter.” , the bank said Thursday.
Once the bond buying program is over, the ECB is expected to start raising interest rates, following the same path as the Bank of England and the US Federal Reserve.
At a press conference after the statement was released, ECB President Christine Lagarde said that the development of the euro area economy “will crucially depend on the evolution of the conflict, the impact of current sanctions and possible additional measures”.
Lagarde noted that inflation had increased “significantly and will remain elevated over the next few months, mainly due to the sharp rise in energy costs”.
Looking ahead, Lagarde said the ECB’s monetary policy would depend on incoming economic data and its “evolving assessment of the outlook.”
She added that the Governing Council of the ECB would take “all necessary measures to fulfill the ECB’s mandate of pursuing price stability and contributing to safeguarding financial stability”.
The interest rate on the ECB’s main refinancing operations and the interest rates on the marginal lending facility and the deposit facility remain unchanged at 0.00%, 0.25% and -0.50% respectively .
“Any adjustment to the key ECB interest rates will take place some time after the end of the Governing Council’s net purchases under the APP and will be gradual,” the bank said in a statement.
“The path of the key ECB interest rates will continue to be determined by the forward guidance of the Governing Council and its strategic commitment to stabilize inflation at 2% over the medium term.”
Bond buying under the ECB’s €1.85 trillion ($2 trillion) Pandemic Emergency Purchase Program, or PEPP, ended in March. However, purchases under the old APP acted as a gateway until the end of the PEPP.
Economists generally expected the ECB to keep policy stable for now and lay the groundwork for action at its June 9 meeting once the uncertain outlook for growth and inflation has been established. .
Minutes from the last meeting on March 10 showed that the Board of Governors was engaged in a heated discussion about the pace of policy normalization.
The war in Ukraine and the subsequent heavy sanctions against Russia, supply chain bottlenecks, high energy prices and concerns about a general shortage of raw materials needed for many industrial processes significantly clouded the economic outlook.
At the same time, inflation rates continue to rise and there are tentative signs that this push is not just fueled by energy prices, but could be more systemic.
A “difficult political compromise”
Anna Stupnytska, global macroeconomist at Fidelity International, said the ECB faces “difficult policy arbitration” that is more complex than that faced by other central banks in developed markets.
“On the one hand, it is clear that the current policy stance in Europe, with interest rates still in negative territory and a balance sheet still growing, is too easy for the high level of inflation that is widening and takes root,” she said after Thursday’s decision.
“On the other hand, however, the Eurozone is facing a huge growth shock, driven simultaneously by the war in Ukraine and China’s activity hit due to the zero-COVID policy. The high-frequency data already point to a blow to eurozone activity in March-April, with consumer-related indicators worryingly weak.”
Fidelity International has a recession in Europe as its base scenario, although Stupnytska said its severity and duration will depend on how new sanctions against Russia play out.
“As a full energy embargo becomes more likely, so does the worst-case recession scenario. We believe that as the growth shock becomes more evident in the data over the coming weeks , the ECB’s focus will likely shift from high inflation to trying to limit economic and market distress as the invasion of Ukraine and its aftermath continues to ripple through the system,” he said. she declared.
“Contrary to market prices, we don’t expect the ECB to raise rates until the fourth quarter of this year or early 2023.”
Gurpreet Gill, macro strategist at Goldman Sachs Asset Management, said the next step in the ECB’s policy normalization program will be a decision on the pace of asset purchases in the next quarter, which it said is likely to be at center of the July meeting.
“With market pricing already pointing to a rate hike in July and a total of three rate hikes this year, we see limited room for any hawkish rhetoric to drive up prices,” Gill added.
Correction: This story has been updated to reflect that the ECB has confirmed that it will end its bond purchases in the third quarter.
– CNBC’s Annette Weisbach contributed to this report.