Dhe European Central Bank (ECB) is paving the way for a change in interest rates, but still leaves plenty of room for possible reactions to the fallout from the Ukraine war. As the Governing Council of the ECB, the central bank’s top monetary policy body, announced on Thursday after its interest rate meeting, the central bank’s bond purchases may end earlier than expected.
The third quarter of this year is mentioned, that is, the period from July to September. There could be interest rate hikes “some time” after that. The central bank replaced the word “shortly” with “some time later” in its terminology for the time of the first interest rate hike after the end of bond purchases.
ECB President Christine Lagarde stressed that this would give the ECB more wiggle room as to how soon key interest rates would be raised after the end of bond purchases. “Some time later” could mean the following week or months later. They do not want to set an exact timetable, but rather react “based on data”, depending on how the economy develops in relation to the Ukraine war.
The ECB now wants to double monthly bond purchases as part of the PPP program to EUR40bn in April. The central bank plans to invest €30 billion in May and €20 billion in June. In the third quarter, new purchases of securities could end entirely, depending on the situation. Initially, the ECB did not want to reduce the volume of APP purchases to €20 billion again until October 2022.
The ECB raises inflation forecasts
Following the sharp rise in inflation rates in the euro area from 5.1 percent in January to 5.8 percent in February, the ECB has now revised its medium-term inflation forecast upwards. In December it had estimated 3.2 percent for the current year, now it is 5.1 percent. In 2023, the inflation rate is expected to be 2.1 (instead of 1.8) percent and then drop to 1.9 (instead of 1.8) percent in 2024. In exchange, the bank central lowered its forecasts for economic growth. For this year, he now expects 3.7 instead of 4.2 percent.
Rising energy prices, the main cause of inflation, are stronger than expected and are driving other prices higher, Lagarde said. Food has also become significantly more expensive. In the case of wages, on the other hand, a stronger increase has not been observed so far.
The ECB emphasized the strong recovery of the economy from the pandemic so far. However, Lagarde also highlighted the additional risks posed by the Ukraine war. For inflation, the consequences of the war could imply risks in both directions: in the short term, inflation will certainly increase due to the increase in energy prices, but in the longer term, the increase in energy prices and uncertainty could also weigh on demand in the euro area. Lagarde explained that there were different points of view in the Governing Council: “We had very intense discussions about the current economic situation, about prospects, about uncertainty.”
The central bank is in talks with the European Union and other political institutions about possible additional support for Ukraine’s institutions and people, Lagarde said. This could also involve instruments such as additional swaps or repurchase lines, ie currency swaps or credit-versus-collateral transactions.
Economists’ reactions varied. Some called the ECB’s decision “hawkish”, ie strongly in the direction of tighter monetary policy, others “too hesitant”. Bank LBBW’s Jens-Oliver Niklasch said he reads the ECB’s announcements that it would raise interest rates at the end of the year unless something unexpected happens. “The ECB is determined to tighten the reins on monetary policy to counter persistently high inflation,” said Dekabank’s Ulrich Kater: “This is subject to the condition that the Ukraine war remains economically tolerable for the economy.” .