The European Central Bank on Thursday reaffirmed its plans to end its bond-buying stimulus later this year, but said the war in Ukraine would leave its options open for future policy decisions due to the pressure on the region’s economy. Raising prices and raising concerns about a recession.
The central bank has kept interest rates at record lows and said any accidental rise would be gradual.
The bank is trying to strike a tough balance. On the one hand, high inflation means there is an opportunity to withdraw stimulus. But the outlook for growing economic growth poses a risk to efforts to tighten monetary policy, as these measures could chill the economy too much and trigger a recession.
“Russia’s aggression in Ukraine is causing extreme suffering,” the bank said in a policy statement on Thursday. “It’s affecting economies in Europe and beyond.”
Prices in the eurozone rose 7.5 percent in March from a year earlier, unprecedented in four decades, and exceeded the central bank’s 2 percent target. “Inflation has risen significantly and will remain high in the coming months, mainly due to the sharp rise in energy spending,” the bank said.
Although the region’s economy is being supported by the reopening after the epidemic lockdown, the war in Ukraine “weighed heavily on business and consumer confidence,” the bank said. Trade disruptions have led to new shortages of materials and rising energy and commodity prices have hampered production, it added.
Concerns about the future of the economy, especially in Germany, Europe’s largest economy, are high because of Russia’s strong reliance on energy. Late last month, the German government’s economic advisers said the outlook had been “severely worsened” by the war, with high inflation rates as well as a high risk of a recession.
Nevertheless, the central bank is being pressured to take further action against inflation and traders are betting that interest rates will rise before the end of the year. Earlier this month, after Eurozone inflation data exceeded expectations, Joachim Nagel, president of Germany’s Bundesbank, said monetary policy “should not miss the opportunity for timely countermeasures.”
At a meeting of the European Central Bank in March, policymakers said they would like to end the bank’s bond-buying activities in the third quarter, a necessary prerequisite for raising interest rates. On Thursday, the bank reinforced this intention.
Following the purchase of 1.7 trillion euros ($ 1.85 trillion) of bonds, the central bank cut off its epidemic-era asset-buying program in March. But it has continued its old bond-buying program. This month, it expects to purchase € 40 billion, followed by € 30 billion in May and 20 20 billion in June.
But interest rates in the eurozone are so low that even when rates start to rise, the policy will probably be advantageous. The central bank’s deposit rate is minus 0.5 per cent of what banks receive for depositing money overnight in the central bank.
“In the current context of high uncertainty, the Governing Council will maintain flexibility, orderliness and flexibility in conducting monetary policy,” the bank said on Thursday.