The European Central Bank (ECB) on Thursday confirmed its plans to end its massive bond-buying stimulus scheme in the third quarter of 2022 — as high inflation raises the odds the central bank will increase interest rates before the end of the year.
The ECB has amassed a portfolio of bonds of about €4.9 trillion.
ECB president Christine Lagarde largely avoided discussion of any rise in interest rates — but her comments that a rise could come “a week” or months after the end of bond buying led some investors to believe that policymakers could discuss the issue at their late July meeting.
The ECB said the war in Ukraine and the associated uncertainty are weighing heavily on the confidence of businesses and consumers.
“How the economy develops will crucially depend on how the conflict evolves, on the impact of current sanctions and on possible further measures,” said the bank.
“At the same time, economic activity is still being supported by the reopening of the economy after the crisis phase of the pandemic.
“Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs.
“Inflation pressures have intensified across many sectors.”
Pietro Baffico, European Economist at Edinburgh investment giant Abrdn: “In line with our expectations, the ECB kept policy unchanged, confirming its gradual shift towards policy normalization, while stressing its mantra for data-dependency and optionality.
“Comments by President Lagarde were overall less hawkish than the market expected following the surge in inflation in March, and the Governing Council confirmed that net asset purchases under the APP should be concluded in the third quarter.
“While this was already in the cards since the March meeting, it indicates even more clearly that the window for rising interest rates is wide open for Q4.
“Given that the ECB remains open minded about when in Q3 net purchases would stop, there is still the possibility of an end before September, to make the meeting ‘live’ on a possible increase in rates.
“On the other hand, this confirmation shuts the door to speculation about a sudden first rate hike in June or July.
“Investors who were already pricing in more front-loaded depo rate hikes over the summer have to push back their expectations, with today’s meeting coming across as less hawkish than had expected.
“This was reflected by the market reaction, with the euro slipping against the USD, and lowering Euro zone bond yields.”
The ECB said in its statement: “At today’s meeting the Governing Council judged that the incoming data since its last meeting reinforce its expectation that net asset purchases under its asset purchase programme should be concluded in the third quarter.
“Looking ahead, the ECB’s monetary policy will depend on the incoming data and the Governing Council’s evolving assessment of the outlook.
“In the current conditions of high uncertainty, the Governing Council will maintain optionality, gradualism and flexibility in the conduct of monetary policy.
“The Governing Council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability.”
The ECB said monthly net purchases under its asset purchase programme (APP) will amount to €40 billion in April, €30 billion in May and €20 billion in June.
“The calibration of net purchases for the third quarter will be data-dependent and reflect the Governing Council’s evolving assessment of the outlook …” said the central bank.
“The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.
“Any adjustments 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 path for the key ECB interest rates will continue to be determined by the Governing Council’s forward guidance and by its strategic commitment to stabilise inflation at 2% over the medium term.
“Accordingly, the Governing Council expects the key ECB interest rates to remain at their present levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term.”