frankfurt : The European Central Bank has confirmed plans to swiftly roll back easy-money policies adopted during the COVID-19 pandemic as the war in Ukraine caused an unprecedented increase in inflation.
Major central banks, including the Federal Reserve, are planning the most aggressive cycle of interest rate hikes in decades, with the broadest impact of global asset prices. Policymakers are eager to remove the pandemic-era stimulus measures to contain inflation, which has reached a decades-high worldwide.
Recent economic data makes it more likely that the bank will end its net bond purchases in the third quarter, the ECB said in a statement. It said it would continuously reduce its net bond purchases, from €40 billion, equivalent to $43.6 billion in April, €30 billion in May and €20 billion in June, confirming earlier plans.
Investors turned to President Christine Lagarde’s news conference for clues about how soon the ECB could begin raising its key interest rate. This rate is currently set at minus 0.5% and has been below zero for almost eight years.
The war threatens to fuel inflation and weaken growth in Europe, which relies heavily on energy imports from Russia. The conflict is sending raw material and energy prices soaring, and hurting consumer and business confidence. It has also disrupted already strained global supply chains, which are critical for Europe’s large export-oriented manufacturers.
This creates a dilemma for ECB officials, who need to control inflation, which touched a record 7.5 per cent in March and does not derail the recovery.
The eurozone economy has not fully recovered from the pandemic and, in addition to war, France is facing political uncertainty related to next week’s presidential elections, when far-right candidate Marine Le Pen faces President Emmanuel Macron . Highlighting the uncertainty, borrowing costs for indebted southern European governments such as Italy are rising strongly.
So far the ECB has proceeded more cautiously than other major central banks, which have already raised interest rates. ECB officials have indicated they will end their massive bond-buying program soon and may start raising interest rates later this year if inflation does not ease. While the ECB is still accumulating tens of billions of dollars of eurozone debt every month, Fed officials have indicated they may begin reducing their bondholdings starting in May. Analysts say there is too much uncertainty and too little hard economic data on the impact of the war for the ECB yet to act.
Eurozone GDP growth is likely to slow to 3% this year as higher energy prices significantly affect inflation and real income, Fitch Ratings said on Wednesday, citing earlier estimates of 4.5% growth. while reducing Eurozone inflation is expected to average 5% this year, Fitch said, more than double the ECB’s target of 2%.
Central banks in both Canada and New Zealand announced a 0.5-cent-point rate hike on Wednesday. Fed officials voted last month to raise the benchmark federal-funds rate to a range between 0.25% and 0.5%, and pencil in six more hikes by the end of the year, the most aggressive pace of rate hikes in more than 15 years. She goes .
Policy makers are eager to avoid the mistakes of the 1970s, when central banks kept borrowing costs low despite a boom in oil prices, causing inflation to spiral out of control.
Georg Kramer, chief economist at Commerzbank in Frankfurt, said, “The 1970s taught us how dangerous it is when central banks do not focus on maintaining price stability, but allow themselves to be used by governments for other goals.” give.” “In this regard, it is a concern that the ECB is particularly eyeing southern member states, which want lower interest rates to be able to more easily repay their high debts.”