MNI STATE OF PLAY:ECB To Maintain Hawkish Shift As Prices Jump

The European Central Bank will take a policy pass on Thursday, giving itself the breathing space of an additional meeting cycle to assess the impact of the war in Ukraine.

While all signals from the Bank point to the maintenance of its recent hawkish shift and move towards normalisation of monetary policy with inflation at such elevated levels, the Governing Council will stress that it is cognisant of the likely slowdown in growth as the war drags on and that it has tools to act if needed.

Although it is unlikely that any firm decisions on policy will be announced before the June meeting, the ECB could signal that asset purchases could end by as early as the end of the second quarter, opening up the possibility for interest rates to rise from as early as July should officials so decide.

No new ECB staff projections will be delivered at the April meet, but official inflation data for March again surprised to the upside, coming in at 7.2% y/y, well above the level many on the Governing Council are comfortable with. Even core inflation is running hotter than expected at 3.1% y/y, although it did slow marginally from the 3.2% registered in February.

TALK THE TALK

With little expected from the policy decision, close attention will again be placed on President Christine Lagarde’s post-meeting policy statement and subsequent press conference.

Undoubtedly Lagarde will be pushed on when the net phase of the Asset Purchase Programme will end and on the timing of the first rate hike, which current guidance indicates could come “some time” later. She is unlikely to offer precise steers on either, though she could say that bond buys could, data permitting, end in June.

A change in the guidance on bond purchases could make all meetings past June ‘live’ to at least the possibility of a hike in the deposit rate from its current -0.5%.

With growing concerns across the eurozone over possible stagflation, Lagarde will be pressed on why the ECB is taking a more measured course of action than may of its peer central banks.

NEW TOOLS

She will also face questions about how the central bank might respond to any blow-out in spreads hitting weaker members of the eurozone. In recent months, the central bank has said it will use the sizeable pool of Pandemic Emergency Purchase Programme reinvestment flows to deal ‘flexibly’ with fragmentation, if needed, although in its December policy statement it was clear in tying any moves to pandemic-related issues.

Now, markets are looking for the ECB to perhaps give guidance on a new tool to deal with severe widening of sovereign bond spreads, although it may be too early for much to be made public. On Thursday, such speculation is likely to be met with confirmation that the ECB has the tools it needs to react flexibly to the challenges it faces, and, as in the past, if fresh innovation is needed, a new tool will be found.