ECB plans to end incentives sooner than expected

The ECB said in a statement that it would keep its key interest rates on hold but pave the way for a hike before the end of the year. The ECB said any rate hikes would occur “sometime” after the end of the bank’s bond-buying program and would be gradual.

Taken together, Thursday’s actions indicate a determined move away from the ultra-easy monetary policies the ECB has introduced in recent years. They reflect growing concerns about inflation, which is near 6% in the eurozone.

Major central banks, including the Federal Reserve, have indicated they want to start raising ultralow interest rates to keep a lid on inflation that has touched multi-decade highs on both sides of the Atlantic.

The war has complicated those calculations, especially in the eurozone, which borders both Russia and Ukraine. The bloc’s deep trade ties with Russia include massive exports and a heavy reliance on Russian oil and gas supplies, which is vital to the region’s large industrial sector.

However, the ECB’s actions show that it is focused on inflation, which is likely to increase as energy prices rise.

Eurozone bond yields rose after the announcement, with German 10-year bond yields rising to 0.280% from 0.206% on Wednesday. Italy’s 10-year bond yield rose to 1.899% from 1.677%. When bond prices fall, yields rise.

Meanwhile, the euro reversed earlier losses and climbed 0.1% to $1.1082. The decline in European stock indexes intensified. The pan-continental Stokes Europe 600 lost 2%, while Germany’s DAX index dropped 3.3%.

Ending the bond-buying program would draw a line under a major stimulus tool that has loomed large over the past seven years. The ECB said purchases under the program would be 40 billion euros, equivalent to $44 billion in April, 30 billion euros in May and 20 billion euros in June. The statement added that buying will end in the third quarter, provided that “incoming data support the expectation that the medium-term inflation outlook will not weaken.”

The Ukraine conflict is a stagflationary blow to Europe. It raises the risk of a new recession by curbing European exports, straining supply chains and raising energy and commodity prices for households and the region’s large manufacturing sector. In the short term, there is also the potential for raising eurozone inflation, which stood at 5.8% in February, which is already nearly three times the ECB’s target of 2%.

European stock markets have fallen far more than their US counterparts over the past month, and the euro has fallen against the dollar, adding to inflationary pressures.

In the US, Fed Chairman Jerome Powell told Congressional officials last week that he would propose a quarter-percentage-point interest rate hike at next week’s meeting, effectively fueling speculation of a larger, half-percentage-point hike. will end.

In February before the Ukraine war broke out, President Christine Lagarde indicated that the ECB could start raising interest rates later this year. Even before the conflict, Europe had less momentum in economic recovery than the US, partly due to lower government spending.

The new ECB staff economic forecast, published on Thursday, is likely to show low economic growth and high inflation.

EU leaders are expected to unveil plans for new government spending when they gather at Versailles outside Paris on Thursday and Friday to discuss their response to Russia’s aggression against Ukraine.

This story has been published without modification to the text from a wire agency feed