ECB confirms the conclusion of its bond purchase in the third quarter

The European Central Bank is facing a difficult equilibrium, with inflation hovering at record highs as it casts a shadow over the war development outlook in Ukraine.

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The European Central Bank kept its monetary policy unchanged on Thursday, but confirmed that its bond purchase would end in the third quarter.

While the war in Ukraine has weakened the economic growth outlook, the governing body is facing a dilemma as inflation soared to 7.5% in March.

The ECB said in a statement on Thursday that it expects to complete its net asset purchases under its APP (Asset Purchase Plan) in the third quarter. It has previously been suggested that this would be the case if supported by data.

“Data coming in from its last meeting with the Governing Council at today’s meeting strengthens the expectation that net asset purchases under the APP will be completed in the third quarter,” the bank said Thursday.

Once the bond purchase plan is completed, the ECB is expected to start raising interest rates following the same path as the Bank of England and the US Federal Reserve.

At a press conference following the release of the report, ECB President Christine Lagarde described how the eurozone economy is developing “mainly depends on how the conflict develops, the impact of the current sanctions and possible further action”.

Lagarde noted that inflation had “risen significantly and will remain high in the coming months, mainly due to a sharp rise in energy costs”.

Looking ahead, Lagarde said, the ECB’s monetary policy will depend on incoming economic data and its “growing assessment of perspective”.

He added that the ECB’s governing body would “take all necessary steps to maintain the ECB’s mandate to maintain price stability and contribute to maintaining financial stability.”

Interest rates

The interest rates for ECB’s major refinancing operations and interest rates for margin loans and deposits are 0.00%, 0.25% and -0.50% respectively.

“Any changes in key ECB interest rates will take place shortly after the end of the net acquisition by the Governing Body under the APP and will be gradual,” the bank said in a statement.

“The path for key ECB interest rates will continue to be determined by the Governing Council’s forward guidance and its strategic commitment to stabilizing inflation at 2% over the medium term.”

The ECB’s 85 1.85 trillion ($ 2 trillion) epidemic emergency purchase plan, or bond purchase under the PEPP, ended in March. However, the purchase under the old APP was used as a bridge at the end of the PEPP.

Once the uncertain outlook for growth and inflation was established, economists widely expected at its June 9 meeting that the ECB would keep policy stable and lay the groundwork for action.

The minutes of the last meeting on March 10 showed that the Governing Body was engaged in a contentious debate on the pace of policy normalization.

The war in Ukraine and severe sanctions on Russia, supply chain sanctions, high energy prices and concerns about the general shortage of materials for many industrial processes have significantly obscured the economic outlook.

At the same time, inflation rates continue to rise, and there are temporary indications that this rise is not only triggered by energy prices, but may be more moderate.

A ‘tough policy business’

Anna Stubnitska, global macroeconomist at Fidelity International, said the ECB was facing a “tougher policy trade” than any other developed market central bank.

“On the one hand, it is clear that the current policy position in Europe is that interest rates are still in a negative territory and that the balance sheet is still growing, making it much easier for high inflation to become more widespread and more entrenched.” She said following Thursday’s decision.

“On the other hand, the euro area is facing the biggest growth shock. Simultaneous war in Ukraine and China’s activity have been affected by the zero-Govt policy. High frequency data already indicate a sharp impact on the euro’s activity. In March-April, consumer indicators are alarmingly weak.”

Stubnitska said Fidelity International has its core case of recession in Europe, although its severity and duration depend on how additional sanctions against Russia emerge.

“As the full energy embargo mounts, so does the worst recession. We hope the ECB’s focus will shift away from high inflation as growth shocks become apparent in the data over the next few weeks. He said.

“Contrary to market pricing, we do not expect the ECB to raise rates until Q4 this year or early 2023.”

Gurpreet Gill, macro strategist at Goldman Sachs Asset Management, suggested that the next milestone in the ECB’s policy normalization agenda would be the decision on the pace of property purchases in the next quarter, which will be the focus of the July meeting.

“Since the market-indirect pricing already points to the July tariff hike and a total of three tariff hikes this year, we see a limited scope for any hawk rhetoric to raise prices,” Gill added.

Correction: This story has been updated to reflect the ECB’s commitment to purchase securities in the third quarter.

– Annette Weisbach of CNBC contributed to this report.

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