ECB President Christine Lagarde may signal that the Governing Council is leaning towards ending net buying early in the third quarter.
Michael Probst | Swimming Pool | Reuters
The European Central Bank faces an increasingly difficult task as it responds this week, with inflation soaring and the economic outlook becoming more uncertain as the Russia-Ukraine war drags on.
Minutes of the last ECB meeting showed that when inflation hit 7.5% in March, acrimonious discussions in the Board of Governors were also heating up about how quickly policy normalization could take place. any.
“Determining the appropriate pace for policy normalization in the current macroeconomic environment has not become easier for the ECB,” said Dirk Schumacher at Natixis.
“The key question for the April meeting is whether an end to net buying will be introduced,” he added, referring to the massive bond purchases the ECB has made to try to stimulate the economy. euro area and push inflation.
One possible option, Schumacher added, is that ECB President Christine Lagarde would signal that the Governing Body is leaning towards ending these net buying activities early in the third quarter.
Once this bond purchase is complete, rate hikes can begin – mirroring central banks in the UK and US
In early April, Dutch central banker and prominent ECB hawk, Klaas Knot, said in early April that when the bank returns from the summer break, “I don’t think we are right now. in a position to rule out any possible scenarios involving a price increase. .. September, October, December – all is possible. ”
With the war in Ukraine and heavy sanctions on Russia, the economic outlook for the eurozone has deteriorated significantly. Congestion of supply chains, high energy prices and concerns about a general scarcity of commodities needed for many industrial processes are weighing on the economic outlook. At the same time, the rate of inflation continues to rise and there are also signs that this increase will not only affect energy prices but also last longer.
“We are increasingly confident that the medium-term inflation dynamics will not return to the pattern we saw before the pandemic,” Lagarde said herself at a conference on March 17. .
“But we need to manage a shock that, in the short term, pushes inflation above target and slows growth.”
Keeping all options on the table will be the key message for Thursday’s meeting. That could also include discussion of a new policy tool, a dormant aid that could be activated in the event that sovereign debt yields to eurozone countries start to fall. started to rise again during policy normalization.
Holger Schmieding, chief economist at Berenberg, said: “The most contentious debate at the ECB may revolve around a potential new tool to prevent hypothetical yield expansion at the pace and/or level which the majority of the ECB would consider excessive,” said Holger Schmieding, chief economist at Berenberg. one note.
Spread refers to the difference in yields between two bonds of different euro area governments. For example, the spread between German and Italian yields is used by market participants as a measure of fear in times of financial stress.
