EconomyECB sticks to plan for gradual tightening of monetary...

ECB sticks to plan for gradual tightening of monetary policy

The European Central Bank on Thursday stuck to its gradual timetable for winding down bond purchases in the third quarter without putting a firm date on when it will raise interest rates despite intensifying inflationary pressures in the eurozone.

Policymakers on the central bank’s governing council, who met this week in Frankfurt, face a dilemma of how drastically to tighten monetary policy in response to record inflation while the risk grows of a sharp economic downturn caused by Russia’s invasion of Ukraine.

The ECB kept its main policy rate unchanged at minus 0.5 per cent and repeated its statement that the “calibration of net purchases for the third quarter will be data-dependent and reflect the governing council’s evolving assessment of the outlook”.

“How the economy develops will crucially depend on how the [Ukraine] conflict evolves, on the impact of current sanctions and on possible further measures,” the ECB said.

“The upside risks to the inflation outlook have intensified,” said Christine Lagarde, ECB president, adding that it could stay higher if price expectations continued to rise and supply chain bottlenecks worsened. “However, if demand were to weaken in the coming months it would weaken inflationary pressures,” she added.

“We’ll deal with interest rates when we get there,” Lagarde said, emphasising that rising price pressures had “reinforced” the council’s expectation that it would end net asset purchases between July and September.

The euro fell while eurozone bonds rallied following the ECB announcement. The single currency was 0.5 per cent lower against the dollar at $1.082, and Germany’s 10-year yield fell 0.02 percentage points from earlier highs to 0.78 per cent.

Markets are pricing in an increase in the ECB’s deposit rate back above zero by the end of the year and to almost 1.5 per cent by the end of next year. But the central bank said any rate rise would be “gradual” and would only take place “some time” after it stops net bond purchases.

Katharine Neiss, chief European economist at PGIM Fixed Income, said the announcement “suggests the door is now wide open to rate rises later this year” but, given the risk to growth from the Ukraine war, “the debate among the governing council will likely shift away from when to start raising rates, to when to stop”.

Many other central banks have already stopped buying bonds and started raising rates. This week, the Reserve Bank of New Zealand and the Bank of Canada both raised rates by half a percentage point, while monetary authorities in South Korea and Singapore also tightened policy.

The US Federal Reserve is expected to raise rates by as much as a half a percentage point at its policy meeting in May, while the Bank of England has increased its main rate three times since December and is expected to do so again at its meeting next month.

The ECB accelerated its timetable for ending net bond purchases at its meeting last month. Since then eurozone inflation has risen to a new record high of 7.5 per cent in March, intensifying calls for the central bank to move even faster in withdrawing its stimulus.

However, the ECB continues to forecast that inflation will dip back below its 2 per cent target in two years’ time, as energy prices retreat and supply chain bottlenecks ease.

The central bank on Thursday also alluded to its plan to introduce a potential “new instrument” to make targeted bond purchases in response to any unwarranted sell-off in the bonds of a particular country or group of countries.

“The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made the governing council’s efforts to achieve its goal more effective,” it said, adding that “under stressed conditions” it would aim to maintain such flexibility.

There has been a sell-off in eurozone sovereign bond markets since the start of this year, as investors anticipate that soaring inflation will force the ECB to stop buying bonds and start raising rates soon.

The spread between German and Italian 10-year borrowing costs has increased only slightly, however, rising from about 1.3 percentage points to 1.6 percentage points since the start of the year.

Still some policymakers fear the fallout from the Ukraine war could reduce growth and increase debt levels in southern European member states, pushing up their borrowing costs faster than for other countries.

Original Source Link

Latest News

U.S. monitoring high-altitude balloon over the west

The U.S. shot down a Chinese surveillance balloon in February 2023.US Department of Defense | Handout | Anadolu...

$30 billion RIA Platform Carson Group Approves To Offer Spot Bitcoin ETFs To Clients

Carson Group, a significant $30 billion registered investment adviser (RIA) platform, has recently announced its approval to offer...

Global cumulative shipments of 5G smartphones crossed 2B in less than five years, a faster adoption rate than 3G or 4G; Apple and Samsung...

Counterpoint Research: Global cumulative shipments of 5G smartphones crossed 2B in less than five years, a faster adoption...

Court Strikes Down California Ban on Possessing Billy Clubs

From Judge Roger Benitez's decision in Fouts v. Bonta(S.D. Cal.): This case is about a California law that...

Why do cats have bald spots in front of their ears?

Cats are known for their fastidious grooming; their soft, thick coats seem to require their constant attention. But...

Must Read

Singapore’s AI ambitions get a boost with $740 million investment plan

The Singapore River and Merlion Park in the...

Zee shares jump 10% after report Sony merger is being revived

The deal, announced more than two years ago,...
- Advertisement -

You might also likeRELATED
Recommended to you