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Free AccessECB Review - March 2022: ECB Speeds Up QE Exit
ECB Review: March 2022
Having already pivoted in a hawkish direction at the February meeting and given the subsequent shock to the growth and inflation outlooks from the subsequent Russian invasion of Ukraine, the ECB was widely expected to stand pat at the March meeting by reiterating the December policy calibration and referencing two-way inflation risks. While President Lagarde emphasised the opposing risks, the decision to accelerate the end of net asset purchases was a hawkish surprise, even though Lagarde preferred a more nuanced interpretation. Under the new setting, net asset purchases conducted under the APP will run at EUR40bn in April, EUR30bn in May and EUR20bn in June with the programme concluded in Q3 provided that incoming data support the medium-term inflation outlook.
The ECB has also severed the link between the end of net asset purchases and the first rate hike, while preserving the sequencing. Previously the ECB had indicated that asset purchases would be concluded ‘shortly before’ policy rates were raised, whereas now policy rates are expected to rise ‘some time after’ the end of asset purchases. This adjustment in the forward guidance embeds some optionality by giving the ECB more time to gauge whether it can proceed with the next stage of monetary policy normalisation.
Although the ECB is weighing the economic consequences of the Ukrainian war, it is clear that concern about inflation running higher for longer is the dominant consideration for now. President Lagarde indicated that the risks to inflation remain tilted to the upside (while risks to growth are tilted to the downside) and that in all of the projected scenarios inflation settles around target over the medium term. By exiting QE, the ECB prevents itself from falling behind the curve and allowing inflation expectations to adjust higher, while de-linking the first rate hike from the end of QE allows the ECB to slowdown progression on normalisation if needed.
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