MNI SOURCES: Ukraine War To Shelve Calls For ECB Rate Hikes

Russia’s invasion of Ukraine is set to put an end to any talk of increasing eurozone interest rates this year even from previously hawkish officials, Eurosystem officials told MNI, as European Central Bank policymakers emphasise two-way flexibility to deal with the competing risks of an additional spike in inflation and a potential blow to output.

This month’s Governing Council meeting will send a message of reassurance, one official said, while pushing ahead with plans to increase the asset purchase programme to EUR40 billion a month in the second quarter.

“They will retain and stress the flexibility in March -- probably leave the APP at 40 billion for Q2 and say events determine we stick with our course for now, but we are very aware of building two-way risks and that we retain our flexibility and can use and adjust our full range of tools as and when needed,” the source said.

Until the Russian attack on Ukraine, Governing Council members had become more hawkish on inflation, with even some officials from normally dovish national central banks admitting that monetary policy might have to be tightened sooner. But the situation has now changed, sources from banks on different parts of the hawk-dove spectrum told MNI.

HIT TO GROWTH

The Ukrainian conflict could take 1% off growth, another eurosystem source said, adding that fiscal policy would be likely to stay more expansive than expected through this year and next. Bond-buying programmes, such as the pandemic emergency purchase programme, and the asset purchase programme, might still be wound down, but other measures remain in place, the source said.

“If the short-term cost is proved to be very high, monetary policy will be less tight (for example end of PEPP and APP programmes, but not touching interest rates),” he said.

The ECB is unlikely to react to any inflation surge prompted by the conflict in the Ukraine, and would provide liquidity if necessary, as MNI has previously reported. (see MNI: ECB Likely To Look Through Any Ukraine Inflation Spike) The ECB should avoid pre-committing on policy steps until the effects of the war become clear, Executive Board member Fabio Panetta said in a speech on Monday, though he added that it might be logical for the ECB to adjust its asset purchases once the crisis has abated.

“It seems that early rate hikes are no longer on the table,” a third official said, adding that any discussion around changing the sequence of normalisation steps to allow rates to rise before QE ends would also be pushed back.

TWO-WAY RISKS

Conflict in the Ukraine injects great uncertainty into the eurozone economy, with some knock-on effects, including a likely increase in defence spending, adding to output, noted another official. But talk of rate rises is now clearly out of place, the official added.

“It's really senseless to discuss whether it's rate hikes in October, December or January. We don't know where we're going to be at by that point.”

A spokesperson declined to comment on the matter to MNI.