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ECB to affirm quicker stimulus exit on inflation: decision guide
ECB

ECB to affirm quicker stimulus exit on inflation: decision guide

3 min. 14.04.2022 From our online archive
New projections should shed more light on the implications of Russia’s invasion
The Euro sculpture monument in front of the Eurotower in Frankfurt, former home of the European Central Bank
The Euro sculpture monument in front of the Eurotower in Frankfurt, former home of the European Central Bank
Photo credit: Shutterstock

The European Central Bank is set to maintain its speedier withdrawal of stimulus as it prioritises stemming relentless inflation over growing risks to the continent’s economy from the war in Ukraine.

The Governing Council will probably hold off from major decisions when it wraps up a meeting in Frankfurt on Thursday. Bundesbank chief Joachim Nagel says June’s gathering, where new projections should shed more light on the implications of Russia’s invasion, will determine the next monetary-policy steps.

Since officials unexpectedly unveiled a faster exit from trillions of euros of asset purchases last month, inflation has soared to 7.5% -- almost four times their target. It may only peak in the middle of the year, according to Chief Economist Philip Lane.

But with business and consumer confidence already plunging, further price pressures loom in the form of a potential European Union ban on Russian energy that could also trigger recessions in nations like Germany, where reliance on imports is high.

Concern over possible stagflation is being dismissed, for now. And despite discord over how quickly to normalise policy, there’s a consensus among ECB officials that bond-buying must be wound down and interest rates lifted from record lows -- as is already happening in the US and the UK

President Christine Lagarde may reveal more on the stimulus debate at her news conference at 2:30 p.m. in Frankfurt. She’s also likely to be probed about a new crisis tool in the works to keep euro-zone bond yields in check as quantitative easing ends.

What Bloomberg Economics says: 

“Lagarde signaled in March that the Governing Council intends to stay on the course of monetary normalisation, despite the war in Ukraine. Bloomberg Economics expects her to reiterate that stance at its next meeting,”

--David Powell, senior European economist.

The ECB will announce its decisions 45 minutes before Lagarde speaks, at 1:45 p.m.  

Asset purchases

Officials will probably stick to the third-quarter end-date for the ECB’s long-standing Asset Purchase Program, though an account of March’s meeting revealed tensions as some pushed for a firm cutoff in the face of record inflation.

With policy makers continuing to stress the importance of flexibility and optionality, a more specific timeline is unlikely to be formalised. But Lagarde may give a hint on whether the Governing Council is leaning toward an earlier or later end.

Net bond-buying under an emergency pandemic program ended in March. There may be an update on plans to reinvest the proceeds of maturing debt.  

Rate hikes

The conclusion of asset purchases is key to determining when the deposit rate may be lifted from -0.5% -- where it’s been since 2019. Under the agreed sequence, borrowing costs will only rise after bond-buying ends, so stopping sooner in the third quarter would open the door to a hike in September.

That’s in line with suggestions from the Governing Council’s more hawkish members. Markets predict an end to negative rates this year, though economists polled by Bloomberg only see liftoff in December via a quarter-point increase. 

Market stress

The ECB is designing an instrument to deploy should the bond yields of weaker euro-area economies rise excessively, according to people familiar with the plan. Lagarde had previously said new tools may be developed to counter such a threat, without providing details.

It’s probably too soon for an announcement as work is at an early stage. In the meantime, as surging energy costs and growing security threats worsen the backdrop for governments, the ECB can lean on reinvestments from its pandemic purchase program. 

©2022 Bloomberg L.P.


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