Euro Area: ECB sticks to plan to gradually scale back quantitative easing in March
At its meeting on 10 March, the European Central Bank (ECB) confirmed its plan to discontinue net purchases under the pandemic emergency purchase program (PEPP) at the end of March. At the same time, in order to cushion the impact of reduced monetary stimulus, it announced that it will raise its asset purchase program (APP) to EUR 40 billion in April, EUR 30 billion in May and EUR 20 billion in June. Moreover, it left the option open to conclude asset net purchases under the APP in Q3 if the inflation outlook does not moderate. Meanwhile, the ECB kept rates on the main refinancing operations, the marginal lending facility and the deposit facility at their respective all-time lows of 0.00%, 0.25% and minus 0.50%.
Inflationary pressures have continued to mount, on the back of surging energy costs but also as price rises have become broad-based. The Bank consequently revised its inflation projections up to 5.1% this year, from its previous 3.2% forecast, and sees inflation coming in at 2.1% and 1.9% in 2023 and 2024, respectively. Meanwhile, the Russian invasion of Ukraine is expected to have a negative impact on an economy which was otherwise showing solid underlying conditions—amid the fading impact of Covid-19 and a strengthening labor market. All in all, the Bank revised down its growth projection for this year to 3.7%, and it expects GDP to expand 2.8% and 1.6% in 2023 and 2024, respectively.
Guidance grew more hawkish, with the Bank stating that rates would remain “at their present levels until it sees inflation reaching 2% well ahead of the end of its projection horizon”, as opposed to the prior meeting’s statement that rates would be “at their present or lower levels”. The ECB added that “any adjustments to the key ECB interest rates will take place some time after the end of our net purchases under the APP and will be gradual”, implicitly opening the door for a possible interest rate hike already this year.
Commenting on the ECB’s decision, Carsten Brzeski, global head of macro at ING, noted:
“All of this means that the ECB is moving on with a very gradual normalisation of monetary policy, keeping maximum flexibility in all directions. This is definitely the best the ECB can do with the ongoing war in Ukraine and extremely high uncertainty. Looking ahead, today’s decisions keep the door wide open to a first rate hike before the end of the year. There is very little to nothing the ECB can do to stop the high and possibly even accelerating inflation at the current juncture, and the prospect of stagflation will further complicate the ECB’s life and any outright tightening of monetary policy.”