European Central Bank keeps interest rates unchanged

European Central Bank President Christine Lagarde attends a debate during a plenary session at the European Parliament on February 14, 2022 in Strasbourg, eastern France.

Frederic Florin | AFP | Getty Images

LONDON — The European Central Bank said on Thursday it would end asset purchases faster than expected as it assesses the economic fallout from Russia’s invasion of Ukraine.

The ECB said in a statement that it would end its bond-buying program in the third quarter, economic data permitting. The central bank added that it stands ready to reverse this decision if the outlook changes.

The surprise move comes amid growing fears that the eurozone economy could soon experience stagflation – the toxic mix of slow economic growth and high inflation. Consumer prices in the 19 countries that use the euro have hit record highs for four consecutive months, reaching 5.8% in February.

“If incoming data confirms the expectation that the medium-term inflation outlook will not weaken even after our net asset purchases end, the Governing Council will conclude the net purchases under the APP in the third quarter,” the bank said, referring to its asset purchase program.

He said monthly net purchases under the program would amount to 40 billion euros ($44.5 billion) in April, 30 billion euros in May and 20 billion euros in June.

The central bank kept interest rates unchanged on Thursday, leaving the benchmark refinancing rate at 0%, the rate on its marginal lending facility at 0.25% and the rate on its deposit facility at -0.5. %.

Any interest rate adjustment will take “some time” after asset purchases end, the bank said, adding it would be “gradual”.

The euro was trading around $1.1079 after the decision, little change for the session. The common currency rose 1.6% on Wednesday to register its biggest daily jump in nearly six years.

The war in Ukraine will have “a material impact”

The ECB meeting in Frankfurt, Germany comes exactly two weeks after Russian President Vladimir Putin launched a full-scale invasion of Ukraine. The conflict has shaken the global economy and sent shock waves through financial markets.

Energy and commodity prices have soared as the Kremlin steps up its attack on Ukraine and Western allies impose a barrage of punitive sanctions on Russia.

“The Russian-Ukrainian war will have a significant impact on economic activity and inflation through higher energy and commodity prices, disruption of international trade and lower confidence,” the president said. of the ECB, Christine Lagarde, during a press conference.

“The extent of these effects will depend on the evolution of the conflict and possible additional measures.”

The ECB described Russia’s war with Ukraine as “a turning point for Europe”, while the Governing Council reaffirmed its commitment to “take all necessary measures” to seek price stability and safeguard the financial stability.

Amid soaring energy prices, the ECB raised its inflation outlook for this year to 5.1% from 3.2%. This forecast is expected to cool to 2.1% in 2023, before dropping to 1.9% in 2024, slightly below the central bank’s 2% target.

“Completely Upside Down”

The ECB’s decision to end asset purchases earlier than expected has shocked analysts who generally expected the central bank to wait until it can better understand the economic impact of the crisis. Ukrainian.

“I think what Christine Lagarde and the ECB Governing Council have managed to do is buy themselves some flexibility here,” Megan Greene, chief global economist at the consultancy, told CNBC on Thursday. Kroll Institute.

“They accelerated the end of the asset purchase program, but they also put some water between when they finish cutting and when they start raising rates, which gives them a lot flexibility in terms of pivoting as data comes out.”

Greene, however, said that in his view “the ECB is doing this completely backwards” and should have looked at interest rate movements before scaling back asset purchases.

She added that it will be “really difficult” for the ECB to restart its asset purchase program if necessary.

A Reuters poll in early March found that the majority of economists expect the ECB to wait until the final months of the year to raise interest rates. However, there is currently no consensus on which month the central bank might end its asset purchase program.

Leslie M. Gill