The European Central Bank (ECB) accelerates the withdrawal of stimuli (the net purchase of bonds could end in June) and clearly opens the door to a rate hike this year in the face of persistent inflation and rising price expectations. On the other hand, the ECB has left the main refinancing interest rate at 0%, the deposit rate (where banks keep their reserves) at -0.5% and the marginal credit facility at 0.25 %.
The risk of stagflation (low growth and high inflation) is high and the ECB wants to be ready to raise interest rates if necessary. For this reason, the ECB could put an end to the APP bond purchase program in June (a necessary condition to start raising rates), which would open the door to a rate hike before the December meeting (October wins integers as the date to raise rates).
new roadmap
The central bank’s statement highlights that based on its updated assessment and taking into account the uncertain environment, it has revised today the purchase schedule of your APP for the next few months. Monthly net purchases under the PPP will be €40 billion in April, €30 billion in May and €20 billion in June.
The previous communication (December meeting) estimated purchases at 40,000 million during the entire second quarter (April, May and June) and 30,000 million in the entire third quarter. With the new schedule, it is not guaranteed that purchases will continue from the summer.
Purchases are in the air from June
The calibration of net purchases for the third quarter will depend on the data. If the incoming data support the expectation that medium-term inflation prospects will not weaken, even after the end of our net asset purchases, the Governing Council will conclude the net purchases three months ahead of schedule in February.
Christine Lagarde, president of the ECB, has highlighted at a press conference that uncertainty is maximum and therefore flexibility must be extraordinary: “The Russian invasion of Ukraine is a turning point for Europe. The Governing Council expresses its full support to the people of Ukraine.”
The central bank has also assured that it will guarantee fluid liquidity conditions and will implement the sanctions decided by the European Union and European governments. And, of course, the Government Council will take the necessary measures to fulfill the ECB’s mandate to seek price stability and safeguard financial stability, according to the statement.
The president of the ECB also wanted to emphasize that the war in Ukraine will have a downward impact on growth and an upward impact on inflation, with special pressure on the prices of some raw materials and food, which are also facing higher prices for fertilizers and various climatic problems.
The double impact of war
This conflict generates a double effect on the economy that puts the central bank in an even more complex situation: on the one hand it has the potential to increase inflation, but on the other it will also be a drag on the economy, bringing the Eurozone closer to the dreaded stagflation, also known as the worst nightmare of a central bank.
The central bank’s team of economists has reduced the growth forecast while they have ‘triggered’ the inflation forecast for this 2022 in the new macroeconomic projections. Despite this reduction in growth, the ECB has focused on inflation, its only mandate on paper, which has led the institution to launch a message hawkish (less stimulus and interest rate hikes in sight).
TD Securities analysts confess that this is “the aggressive turn we expected from the ECB today, with an announcement that the PPP program will end relatively quickly. This is much more aggressive than many assumed; indeed, it echoes general expectations before the war in Ukraine and suggests that, despite the potentially severe hit to euro area growth in the coming months, upside risks to inflation still dominate.”
Gilles Möec, economist at Axa, recalls that the ECB’s tools are limited and the context does not help either, given the high inflation in the euro zone (5.8% year-on-year in February). “A big difference with the pandemic is that the ECB is not in the same situation to help governments finance a new increase in public debt. This time, inflation is the first manifestation of the crisis in the economic field, not a delayed effect”, assures the Axa expert.
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