ECB President Christine Lagarde could signal that the Governing Council is leaning toward ending net purchases early in the third quarter.
Michael Probst | swimming pool | Reuters
The European Central Bank faces an increasingly difficult task this week as inflation surges and the economic outlook becomes more uncertain as the war between Russia and Ukraine drags on.
The minutes of the ECB’s last meeting show that when inflation reached 7.5% in March, heated discussions also took place in the Governing Council about how quickly the normalization of monetary policy should take place.
“Determining the appropriate pace for policy normalization in the current macroeconomic environment has not become any easier for the ECB,” Natixis’ Dirk Schumacher said in a recent research note.
“The key question for the April meeting is whether the end of net purchases will be brought forward,” he added, citing massive asset purchases undertaken by the ECB to try to stimulate the euro-zone economy and boost inflation.
One option could be for ECB President Christine Lagarde to signal that the Governing Council is leaning toward ending these net purchases early in the third quarter, Schumacher added.
Once this bond purchase is complete, rate hikes can begin – a mirror image of central banks in the UK and US
Dutch central banker and renowned ECB hawk Klaas Knot said in early April that if the bank was back from its summer break then “I don’t think we’re in a position to rule out any possible scenario at this point in terms of launch. .. September, October, December – anything could be possible.”
With the war in Ukraine and the severe sanctions against Russia, the economic prospects for the euro zone have deteriorated sharply. Bottlenecks in the supply chain, high energy prices and concerns about a general shortage of raw materials required 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 increase is not only due to energy prices but is lasting.
“We are increasingly confident that, over the medium term, inflation dynamics will not return to the pattern we saw before the pandemic,” Lagarde himself said at a March 17 conference.
“But we have to deal with a shock that pushes inflation above our target in the short term and reduces growth.”
Keeping all options open will be the main message for Thursday’s meeting. This could also include discussion of a new policy tool, a dormant lifeline that could be activated if eurozone countries’ government bond yields rise again as part of the monetary policy normalization process.
“The most controversial debate at the ECB may revolve around a possible new tool to prevent a hypothetical widening of yield spreads at a pace and/or level that an ECB majority might consider excessive,” said Holger Schmieding, chief economist at Berenberg , in a note.
A spread refers to the difference in yield between two bonds issued by different Eurozone governments. For example, the spread between German and Italian yields is used as a measure of fear by market participants in times of financial stress.