MNI STATE OF PLAY: ECB Adopts Flexible Wording On Rates Timing

The European Central Bank accelerated the expected end of its asset purchases programme at its meeting on Thursday but gave itself room to delay any subsequent rate hikes as the war in Ukraine both raised the prospect of a near-term spike in inflation and posed downside risks to the eurozone economy.

After what ECB President Christine Lagarde described as a meeting seeing differing opinions amid high levels of uncertainty, the Governing Council opted to set its Asset Purchase Programme at EUR40 billion in April, but then to reduce it by EUR10 billion a month with a view to ending bond buys in the third quarter if data permits. This was faster than the pace anticipated in December, when it said purchases would continue at EUR40 billion a month throughout the second quarter, and at EUR30 billion in Q3.

But in its statement the ECB also removed a commitment to end net purchases “shortly before” it alters rates, replacing it with guidance for adjustments to rates to begin “some time after” the end of net bond buys.

“Some time after is an open time horizon, which will be data dependent,” Lagarde told the press conference. “It can be the week after, or it can be months later.”

While insisting that the move to bring forward the end of bond purchases, which is also data dependent, did not imply any acceleration of monetary normalisation, Lagarde also noted that the ECB sees it as "increasingly likely" that inflation will stabilise around 2% in all economic scenarios, one of its key conditions for raising rates.

INFLATION SPIKE

With the Ukraine war feeding energy prices in particular, March’s Eurosystem staff projections saw headline euro area average inflation in 2022 revised sharply higher to 5.1%, up 1.9 percentage points on the previous estimate. By 2024, it was seen back at 1.9%. This year’s growth was downgraded by half a percentage point to 3.7%, slowing to 2.8% next year.

But, while risks to the outlook are tilted to the downside, the European economy continues its recovery from the Covid pandemic, Lagarde said, noting that energy prices are expected to stabilise throughout the projection horizon and that there is so far no sign of their feeding into strong upward pressure on wages.

The Governing Council also removed a reference to keeping interest rates at their present “or lower” levels until the conditions for rate hikes have been met, and said it was continuing to monitor bank funding conditions. Net purchases under the Pandemic Emergency Purchase Programme will end this month, but could be resumed to counter negative shocks related to the pandemic.

The ECB will also examine the calibration of its two-tier system for reserve remuneration, which shelters banks from some of the effects of negative interest rates, it said. Looking to the risk of regional spillovers from the Ukraine conflict, it will also extend its EUREP repo facility until Jan. 15 2023, continuing to complement its regular euro liquidity-providing arrangements for non-euro area central banks.