LONDON (Reuters) – The European Central Bank kept policy unchanged on Thursday, signalling a steady reduction of stimulus over the coming months as inflation remains uncomfortably high.
The ECB has been taking cautious steps for months to unwind support but has so far avoided a hard schedule, and Thursday’s decision was in a similar vein, confirming the direction of travel with few specifics beyond the coming months.
The ECB said it plans to cut bond buys under its Asset Purchase Programme to 30 billion euros in May and 20 billion euros in June from the current 40 billion euro pace, with buys then ending at some point in the third quarter.
Market reaction:
Euro zone bond yields fell after the policy statement, with German two-year bond yields down 5 bps on the day.
The euro slipped into negative territory, down 0.2%
Money markets also trimmed expectations of ECB rate hike bets by the end of the year.
Here is a summary of analyst comments:
CARSTEN BRZESKI, GLOBAL HEAD OF MACRO AT ING:
“Interest rates remain unchanged, and there was no new hint at the future path of rates. 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.”
“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.”
STEVE RYDER, SENIOR PORTFOLIO MANAGER, AVIVA INVESTORS GLOBAL SOVEREIGN BOND FUND:
“This year’s upside inflation surprises have continued to accelerate ECB normalisation at each meeting, but despite the March inflation print being at a record high the ECB have today maintained their current stance. Downside risks to growth are increasing and uncertainty around Ukraine and the impact on inflation will continue to weigh on confidence. With markets already pricing a significant degree of rate normalisation we see the rate outlook from here as much more balanced.”
ANNA STUPNYTSKA, GLOBAL MACRO ECONOMIST, FIDELITY INTERNATIONAL:
“Recession in Europe is already our base case, but its magnitude and duration crucially depend on the nature of further sanctions on Russia. As a full energy embargo is becoming more likely, so is the worst case recession scenario.
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 ECB to hike rates until Q4 this year or early 2023.”
STUART COLE, CHIEF MACRO STRATEGIST, EQUITI CAPITAL, LONDON
“We have had confirmation that the asset purchase programme will end in Q3. That leaves open the possibility of an interest rate rise being delivered before year-end and accordingly market expectations of a first hike coming in December are likely to firm.
“But they are also keeping open the possibility of providing more support if needed, noting that the PEPP can be restarted in the event of another COVID crisis – and you can probably add to that if the economic fallout from the Ukraine war turns out to be worse than anticipated.”
KENNETH BROUX, FX STRATEGIST, SOCIETE GENERALE, LONDON:
“The knee-jerk pullback in the euro/dollar suggests some were positioned for something more hawkish from the European Central Bank.”
(Reporting by London Markets Team; Compiled by Saikat Chatterjee)
