The European Central Bank could bring forward the end of bond purchases

ECB President Christine Lagarde could signal that the Governing Council is leaning towards an end to net purchases at the start of the third quarter.

Michael Probst | Swimming pool | Reuters

The European Central Bank faces an increasingly difficult task as it meets this week, with inflation soaring and an economic outlook increasingly uncertain as the Russia-Ukraine war drags on .

Minutes from the latest ECB meeting show that as inflation hit 7.5% in March, tense discussions in the Governing Council also intensified over the speed of policy normalization.

“Determining the appropriate pace for policy normalization in the current macroeconomic environment has not become easier for the ECB,” Natixis’ Dirk Schumacher said in a recent research note.

“The crucial question for the April meeting is whether the end of net purchases will be brought forward,” he added, referring to the massive bond purchases the ECB has undertaken in an attempt to stimulate the economy. of the euro area and drive up inflation.

One option could be for ECB President Christine Lagarde to signal that the Governing Council is leaning towards ending such net purchases early in the third quarter, Schumacher added.

Once this bond buying is complete, interest rate hikes can begin – much like the central banks of the UK and the US

Dutch central banker and renowned ECB hawk Klaas Knot said earlier in April that when the bank is back from its summer break, then “I don’t think we are currently in a position to rule out any possible scenarios regarding take-off”. .. September, October, December – anything could be possible.”

With the war in Ukraine and the heavy sanctions against Russia, the economic outlook for the Eurozone has deteriorated sharply. Supply chain bottlenecks, high energy prices and concerns about a general shortage of raw materials needed for many industrial processes are weighing on the economic outlook. At the same time, inflation rates continue to rise and there are also tentative signs that this push is not just driven by energy prices, but is more persistent.

“We are increasingly convinced that the dynamics of inflation over the medium term will not return to the pattern we saw before the pandemic,” Lagarde herself said at a conference on March 17.

“But we have to manage a shock that, in the short term, pushes inflation above our target and reduces growth.”

Keeping all options on the table will be the main message of Thursday’s meeting. This may also include discussions on a new policy instrument, a dormant backstop that could be activated in the event that sovereign debt yields for eurozone countries begin to widen again as part of the policy normalization process. .

“The most contentious debate at the ECB may revolve around a potential new tool to prevent a hypothetical widening of yield spreads at a pace and/or level that a majority of the ECB might view as excessive,” he said. said Holger Schmieding, chief economist at Berenberg, in a note.

A spread refers to the difference in yield between two bonds from different Eurozone governments. The spread between German and Italian yields, for example, is used as a fear indicator by market participants in times of financial stress.

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