The ECB surprises the markets: it prepares the rate hike and reduces the purchase of debt

  • The brutal escalation of inflation has weighed more on the European Central Bank than the economic effects of the invasion of Ukraine

surprise of the European Central Bank (ECB). The monetary authority of the euro zone has decided this Thursday advance the calendar of reduction of debt purchases public and private announced in December and has left the door open to raise interest rates at the end of the year or, at the latest, the beginning of the next, in what would be the first increase in the price of money since July 2011. analysts did not expect that the governing council of the institution take any action at the moment, but the brutal inflation escalation has weighed more on the body than the uncertainty about the impact that the invasion of Ukraine in the euro zone economy.

As planned since its last meeting last year, the exceptional program purchase of public and private debt due to the pandemic (PEPP) will conclude at the end of this month. The novelty is that the acquisitions of the program launched in mid-2014 (APP) will increase temporarily, but not until October but until June. Thus, they will rise from the current 20,000 million euros per month to 40,000 million in April and 30,000 million in May, to return to 20,000 million in June.

Even more relevant is that the ECB has announced that will end to said acquisitions in the third trimester (July, expected) “if incoming data supports the expectation that the medium-term inflation outlook will not weaken after the end of net asset purchases.” This is a key decision, as the institution has confirmed that will raise rates “some time later” to stop such purchases. The message is calculatedly more ambiguous than the one it had been using until now (it assured that the rates would rise “shortly after” the purchases were completed, which was usually interpreted as in the following quarter), but it clearly leaves the door open to making money more expensive. to end of the year or beginning of the next.

Perfect storm

The economic effects of the invasion of Ukraine have caught the euro central bank with the changed foot. In the previous weeks, he had signaled that he could tighten his measures faster than announced in December in the face of the strong and persistent increase in the price level. The market, however, thought that it was not going to do so for the moment since the war is a perfect storm for the monetary authority. European dependence on Russian oil and gas is set to rise even more inflationbut the sanctions on the Putin regime are going to provoke lower growth.

It is, therefore, a situation more devilish than that caused by the outbreak of the pandemic, since then the economic recession was accompanied by a collapse in prices due to the collapse in demand, which gave the ECB room to take measures to support activity. The key is that your mandate is limited to control inflation (which is at 2% in the medium term) and does not include other concepts (not like that of the US Federal Reserve, which must also promote full employment). Therefore, the central bank has been forced to act.

Messages and forecasts

Analysts assumed that the ECB would not take action given the current situation. All eyes were on the posts that its president can launch, Christine Lagarde, at the press conference that he will offer at 2:30 p.m. And also in the forecast update economics of the organization. In December, it calculated that the CPI for the euro zone would average 3.2% this year, 1.8% next and 1.8% in 2023, while GDP would rise 4.2%, 2.9% and 1.6%, respectively. For now, inflation in the monetary union marked a new all-time high of 5.8% in February, with Spain at 7.4% (highest since 1989).

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“We consider it to be too soon for the ECB to take a definitive stance on monetary policy, given the uncertain geopolitical landscape. Instead, we expect the Governing Council to stay on the current path for now. On the other hand, we would like to highlight that the central bank is flexible enough to adjust its policy accordingly if things change in any direction”, they had pointed out from Monex Europe a few hours before the ECB communicated the result of the meeting of his advice.

Oil is now around 130 dollars per barrel, while natural gas in Europe is around 250 euros per megawatt hour compared to 80 euros a month ago. The same happens with other raw materials. “This situation leads one to think of persistent inflation in the coming months and that it will condition the actions of the central banks. If a month ago the markets already had doubts about the possibility that the central banks would make a mistake in their monetary policy in the coming months, now the fears are even greater. Your situation is not easy“, They have highlighted from Portocolom AV.

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