European Central Bank President Christine Lagarde takes part in a debate during the plenary session of the European Parliament on February 14, 2022 in Strasbourg, eastern France.
Frederic Florin | Afp | Getty Images
LONDON – The European Central Bank on Thursday announced it would wind down asset purchases faster than planned as it assesses the economic impact of Russia’s invasion of Ukraine.
The central bank said in a statement that it intends to end the bond buying program in the third quarter. He added that he was ready to reconsider this decision if the prospects change.
“If the incoming data supports expectations that the medium-term inflation outlook will not weaken even after the end of our net asset purchases, the Board of Governors will complete APP net purchases in the third quarter,” the bank said in a statement. its asset purchase program.
It says monthly net purchases under the program will be 40 billion euros ($44.5 billion) in April, 30 billion euros in May and 20 billion euros in June.
The central bank left interest rates unchanged on Thursday, leaving the base refinancing rate at 0%, the margin line rate at 0.25% and the deposit line rate at -0.5%.
Market participants will be keeping a close eye on ECB President Christine Lagarde’s press conference at 13:30 London time for hints on Europe’s growth outlook as the crisis escalates.
Following the decision, the euro traded around $1.1079, little changed in the session. The common currency rose 1.6% on Wednesday, posting its sharpest daily gain in nearly six years.
The ECB described Russia’s conflict with Ukraine as a “watershed for Europe” and the Governing Council reaffirmed its commitment to “take whatever action is necessary” to ensure price stability and protect financial stability.
The ECB meeting in Frankfurt, Germany comes exactly two weeks after Russian President Vladimir Putin launched a full-scale invasion of Ukraine. The conflict rocked the global economy and rocked financial markets, with Western allies imposing a flurry of sanctions on Russia.
Energy and commodity prices have risen sharply as the Kremlin ramps up its crackdown on Ukraine, prompting economists to fear that the eurozone economy could face a stagflationary shock. This is a poisonous cocktail of sluggish economic growth and high inflation.
“Full back”
The decision of the ECB to curtail the purchase of assets earlier than planned came as a surprise to the markets. Analysts generally expected the central bank to refrain from making any policy statements until it could better understand the economic implications of the Ukraine crisis.
“I think Christine Lagarde and the ECB’s governing board have managed to buy themselves some flexibility here,” Megan Green, chief economist at consulting firm Kroll Institute, told CNBC Thursday.
“They have accelerated the roll-out of the asset purchase program, but they have also added some water between when they end the decline and when they start raising rates, which gives them more flexibility in terms of pivoting as the data comes in. “
However, Greene said she believes “the ECB is doing it all the other way around” and should have kept an eye on changes in interest rates before cutting back on asset purchases.
“Their asset purchase program is the only way the ECB can really really solve the problem of fragmentation in the eurozone. And now the eurozone is facing another asymmetrical blow to the economies of its member states,” Greene said.
She added that it would be “very difficult” for the ECB to launch its asset purchase program again if the need arises.
Consumer prices in the 19 countries that use the euro currency rose to record highs for four consecutive months, most recently hitting 5.8% in February. The ECB aims for 2% inflation over the medium term.
There are also fears that the Ukrainian conflict could create additional problems for supply chains already disrupted by the coronavirus pandemic, which will negatively affect economic growth along with rising oil and gas prices.
A Reuters poll in early March showed that most economists expect the ECB to wait until the last few months of the year to raise interest rates. However, there is currently no consensus as to which month the central bank may end its asset purchase program.