Ukraine: ECB gives itself more time before raising rates

The European Central Bank decided on Thursday to accelerate the gradual withdrawal of its debt purchases while allowing time to act on rates, while the invasion of Ukraine by Russia upsets its plans for monetary tightening.

The program to buy back public and private securities, the ‘QE’, the main weapon of the central bank launched during the years of sluggish inflation, will end faster than initially announced, while prices are soaring in the euro zone.

Monthly net purchases of private and public debt will amount to 40 billion euros in April, 30 billion euros in May and 20 billion euros in June, according to a press release.

The Governing Council ‘will conclude the net purchases (…) in the third quarter’ if the outlook for medium-term inflation ‘does not weaken’, it added.

Previously, the ECB wanted to reduce them to 20 billion from October only and let them last ‘as long as necessary’.

As expected, the institute also announced the end following March of the emergency program of 1,850 billion euros in debt purchases launched in 2020 to counter the recession caused by the pandemic, the ‘PEPP’.

Similarly, the key rates stayed at their historic lows, in particular the negative 0.50% taxing part of the bank liquidities not distributed as credit to the economy.

But the ECB no longer asserts, contrary to what it has done so far, that a halt to these debt purchases will automatically be followed by a rise in key rates, which would be the first since 2011.

‘Any adjustment to the key ECB interest rates will take place some time following the end of the Governing Council’s net purchases under the APP (the asset purchase programme, editor’s note) and will be gradual’, is he indicated without further temporal precision.

Given the risk of stagflation and high uncertainty, this decision “gives the central bank maximum flexibility and leaves open the option of a rate hike before the end of the year”, analyzes Carsten Brzeski, from ING Bank.

Rester flexible

In front of the press from 1:30 p.m. GMT, the president of the institution Christine Lagarde will have to find the words to explain that the ECB wants to remain flexible, while reaffirming its desire to fight once morest inflation, while the American and British central banks are much more determined.

The effects of the war started by Vladimir Putin were to be at the heart of the discussions of the Board of Governors.

This major crisis shakes up the communication adopted in February by the central bank.

She then paved the way for a “normalization” of her policy following two years of massive support for the economy in the face of the Covid-19 pandemic. Analysts were counting on a possible increase, at the end of the year, in key rates.

But the war at the gates of Europe and the sanctions taken by the West once morest Russia will affect the economies of the euro zone.

The risk of ‘stagflation’, the dreaded combination of inflation and economic stagnation, has ‘clearly increased’, observes Carsten Brzeski, economist at ING.

The rise in prices had already experienced a worrying acceleration in February to a record level of 5.8% in the euro zone.

‘Ready for any measure’

Fuels expected at 2.20 euros per liter, rising food prices: high inflation is here and will weigh on activity, accentuated by the prolonged disruptions in supply chains and the decline in confidence.

The ECB will publish new macroeconomic projections on Thursday incorporating a first calculation of the presumed effects of the Ukrainian conflict.

At this stage, President Christine Lagarde just said she was “ready to take any necessary measure” to ensure price stability, words that she might clarify in front of the press.

Faced with inflation set to permanently exceed the 2% target set by the ECB, central bankers in the euro zone have already made their difference heard in recent days.

Some have recently preached ‘caution’, like the Italian Fabio Panetta, member of the ECB’s executive board, while on the side of the orthodox Bundesbank, its president Joachim Nagel pleaded to ‘keep an eye’ on the timing of the credit crunch. The rulings of the day indicate that this view has been prevalent.

/ ATS