The European Central Bank (ECB) left its monetary policy unchanged on Thursday (April 14), signaling that it will steadily scale back stimulus measures in the coming months given the still very high inflation.
The ECB has been taking cautious steps to reduce support for months, but has so far rejected a strict timeline. Thursday’s decision confirmed the course of action for the next few months without further details.
The ECB said it plans to reduce bond purchases under its Asset Purchase Program (APP) from the current 40 billion euros to 30 billion euros in May and 20 billion euros in June, with purchases ending sometime in June to be discontinued in the third quarter.
“The figures received since the last meeting support the central bank’s expectation that net asset purchases under the APP should be completed in the third quarter,” the ECB said in a statement.
The ECB added that any change in interest rates would come “some time” following the end of bond purchases, a determination that might last several weeks or months.
However, the ECB noted that the size and duration of asset purchases might change and said the bank reserves the right to change any of its policy instruments.
“The Governing Council stands ready to adjust all of its instruments within its mandate, including flexibility where appropriate, to ensure inflation stabilizes at its 2% target over the medium term,” the ECB said.
The decision to continue scaling back stimulus comes following inflation hit a record high of 7.5 percent last month, well above the ECB’s 2 percent target.
Even longer-term expectations have now moved well beyond this target, raising the risk that high price growth might falter.
As far as the short-term economic development is concerned, ECB President Christine Lagarde was rather cautious.
“In the first quarter of 2022, growth is estimated to have remained weak, mainly due to pandemic-related restrictions. Several factors suggest that growth will also slow in the coming period,” she told a news conference, arguing that the war in Ukraine has hurt business confidence.
“The war has created fresh shortages, while a fresh set of pandemic measures in Asia are contributing to supply chain difficulties,” she said.
The rising cost of energy and the ongoing difficulties in the supply chain are the main factors driving the price increase.
Some economists believe the ECB should tighten monetary policy to curb inflation. Other economists argue that the ECB can only affect the demand side, while most of the pricing problems stem from the supply side of the economy.
