MNI STATE OF PLAY: ECB Normalisation On Course As Prices Spike

Recent economic data reinforce the European Central Bank’s expectations that it will end its net asset purchases in the third quarter of 2022, the ECB said on Thursday after its meeting, noting that final calibration of bond buys from July onwards will reflect the "evolving assessment of the outlook," including the economic impact of the war in Ukraine.

Although noting that growth would likely slow in the months ahead, despite residual support from monetary and fiscal policy and continuing post-pandemic reopening, the ECB said that inflation has increased significantly and "will remain high over the coming months", mainly because of the sharp rise in energy costs. "Inflation pressures have intensified across many sectors," the ECB said.

Interest rates were again left on hold, with the deposit rate at -0.5%, the refi rate at 0% and the marginal lending rate at 0.25%, with the central bank confirming that rates would not rise until "some time" after net purchases ended. That period could cover "a week or some months," as the ECB seeks "optionality and flexibility," President Christine Lagarde told a news conference.

Confirming that monetary policy remains on a path to normalisation, Lagarde noted that the ECB had firmed up its commitment to phasing out the net phase of its Asset Purchase Programme at some point of the third quarter after seeing the most recent data. However, the Monetary Policy decision was explicit in noting that "in the current conditions of high uncertainty, the Governing Council will maintain optionality, gradualism and flexibility in the conduct of monetary policy."

REINVESTMENTS

Policymakers also confirmed that reinvestments under the Pandemic Emergency Purchase Plan, or PEPP, would continue until at least the end of 2024, while APP reinvestments would continue in full for an extended period of time past the date when key ECB interest rates start rising.

Addressing concerns that PEPP reinvestments, irrespective of their flexibility, may not be appropriate for responding to any non-pandemic related fragmentation of policy transmission across the eurozone, Lagarde said the ECB could if necessary quickly design and deploy new tools to deal with any financial consequences of the the war in Ukraine. Staff at the central bank were adept at 'thinking on their feet', Lagarde said and would undoubtedly come up with options for consideration.

Any new tool would have the same flexibility as the pandemic-related reinvestment phase of the PEPP and be a boost to policy transmission as the central bank moves along the path of normalisation, Lagarde said in response to a question from MNI.

Lagarde also told reporters the level of the euro is having an impact on inflation, although she added that the exchange rate had not been discussed on this occasion. Her comments came after Dutch central bank president Klaas Knot said in an interview that the ECB should guard against a weakening euro.

There is now an unusually long 8-week period before the central bank next gathers for its next monetary policy meeting on June 9.