European Central Bank keeps interest rates unchanged

European Central Bank President Christine Lagarde attends a debate during a plenary session at the European Parliament on February 14, 2022 in Strasbourg, eastern France.

Frederic Florin | AFP | Getty Images

LONDON — The European Central Bank said on Thursday it would end asset purchases faster than expected as it assesses the economic fallout from Russia’s invasion of Ukraine.

The central bank said in a statement that it would aim to end its bond-buying program in the third quarter. He added that he was ready to reverse this decision if the outlook changed.

“If incoming data confirms the expectation that the medium-term inflation outlook will not weaken even after our net asset purchases end, the Governing Council will conclude the net purchases under the APP in the third quarter,” the bank said, referring to its asset purchase program.

He said monthly net purchases under the program would amount to 40 billion euros ($44.5 billion) in April, 30 billion euros in May and 20 billion euros in June.

The central bank kept interest rates unchanged on Thursday, leaving the benchmark refinancing rate at 0%, the rate on its marginal lending facility at 0.25% and the rate on its deposit facility at -0.5. %.

Market participants will be watching ECB President Christine Lagarde’s press conference at 1:30 p.m. London time closely for clues on Europe’s growth prospects given the escalating crisis.

The euro was trading around $1.1079 after the decision, little change for the session. The common currency rose 1.6% on Wednesday to register its biggest daily jump in nearly six years.

The ECB described the conflict between Russia and Ukraine as “a turning point for Europe”, while the Governing Council reaffirmed its commitment to “take all necessary measures” to seek price stability and preserve the financial stability.

The ECB meeting in Frankfurt, Germany comes exactly two weeks after Russian President Vladimir Putin launched a full-scale invasion of Ukraine. The conflict has rocked the global economy and sent shockwaves through financial markets, with Western allies imposing a barrage of sanctions on Russia.

Energy and commodity prices have soared as the Kremlin steps up its attack on Ukraine, raising concerns among economists that the eurozone economy could face a stagflationary shock . This refers to the toxic cocktail of sluggish economic growth and high inflation.

“Completely Upside Down”

The ECB’s decision to end asset purchases earlier than expected surprised the markets. Analysts generally expected the central bank to suspend any policy announcements until it can better understand the economic impact of the Ukraine crisis.

“I think what Christine Lagarde and the ECB Governing Council have managed to do is buy themselves some flexibility here,” Megan Greene, chief global economist at the consultancy, told CNBC on Thursday. Kroll Institute.

“They accelerated the end of the asset purchase program, but they also put some water between when they finish cutting and when they start raising rates, which gives them a lot flexibility in terms of pivoting as data comes out.”

Greene, however, said that in his view “the ECB is doing this completely backwards” and should have looked at interest rate movements before scaling back asset purchases.

“Their asset purchase program is the only way for the ECB to realistically fight fragmentation in the Eurozone. And now the Eurozone faces another asymmetric blow to the economies of its member states” , Greene said.

She added that it will be “really difficult” for the ECB to restart its asset purchase program if necessary.

Consumer prices in the 19 countries that use the euro hit record highs for four consecutive months, most recently reaching 5.8% in February. The ECB is targeting inflation of 2% in the medium term.

There are also fears that the conflict in Ukraine could cause further problems for supply chains already disrupted by the coronavirus pandemic, which would negatively impact economic growth alongside soaring oil and gas prices.

A Reuters poll in early March found the majority of economists expect the ECB to wait until the last months of the year to raise interest rates. However, there is currently no consensus on which month the central bank might end its asset purchase program.

Edward N. Arrington