The European Central Bank declined to raise interest rates today, despite a 7.5% rate of Eurozone inflation and rate hikes issued by the Bank of England and the US Federal Reserve over the last couple of months.
The Bank reportedly intends to cut bond buys under its Asset Purchase Programme, with a level of 30 billion euros in May followed by 20 billion euros in June from its existing 40 billion euro pace, with buys planned to end at sometime in the third quarter.
The choice was forecast by analysts before the decision was announced, due to the uncertainty surrounding Russia’s invasion of Ukraine and the impact on the economy over the long haul.
“The ECB are in a tricky situation as the Eurozone is facing a deteriorating growth outlook due to the war in Ukraine, whilst also trying to tame rampant inflation,” said BRI Wealth Management portfolio manager Tom Hopkins.
“The war is likely to mean that rates will stay lower for longer, until the economic consequences of the conflict are fully understood.”
“Lagarde’s message in March was ‘any increase in the ECB policy rate will be gradual and come only after its bond-buying programme ends’ which is estimated to be concluded in Q3, albeit could be revised if the economic outlook continues to deteriorate warranting a change in the programme.”
Analysts weighed in on several matters broached during the conference, including rumblings concerning a new asset purchase programme and the ECB’s focus moving into shocks to the market as the Ukraine war escalates and inflation rises.
“To probably tackle the recent debate on how the ECB could deal with widening bonds spreads and rumours about a new asset purchase programme, the ECB stressed that the reinvestments of the Pandemic Emergency Purchase Programme could be used to tackle market fragmentation,” said ING Global Head of Macro Carsten Brzeski.
“Europe is different and the ECB is different. Instead of any panic reaction, the ECB continues with its very gradual normalisation, which in our view is bringing an end to net asset purchases over the summer and an end to the era of negative interest rates before the end of the year.”
The impact of a full-blown Russian energy embargo was also speculated, with experts commenting that the knock-on effect would tilt Europe into the worst case recession scenario.
“Recession in Europe is already our base case, but its magnitude and duration crucially depend on the nature of further sanctions on Russia,” said Fidelity International Global Macro Analyst Anna Stupnytska.
“We believe as the growth shock becomes more evident in the data over the next few weeks, the ECB’s focus will likely shift away from high inflation towards trying to limit economic and market distress as the invasion of Ukraine and its consequences continues to ripple through the system.”
“Contrary to market pricing, we do not expect the European Central Bank to hike rates until Q4 this year or early 2023.”