Wednesday, March 22

ECB to Buy Time on Stimulus Exit in Cloud of War: Decision Guide

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The European Central Bank is set to decide how it can shield the continent’s economy from the consequences of the war in Ukraine while navigating an unprecedented inflation shock that shows no signs of abating.

Faced with those twin challenges, officials convening this week are expected to take a timeout from charting a path out of extraordinary stimulus measures that include trillions of euros of asset purchases and below-zero interest rates.

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Doing so would mark another abrupt shift in the ECB’s stance after President Christine Lagarde just last month turned sharply more hawkish in the face of inflation that’s almost three times the ECB’s 2% target.

The danger now is that Russia’s invasion and the global sanctions in response curb Europe’s rebound from the pandemic, raising the specter of “stagflation.” Economists doubt that fresh quarterly economic projections due this week will provide sufficient clarity for action from the ECB, with June a more likely juncture for major decisions that could include a commitment to end bond-buying three months later.

Follow our live blog on the ECB rate decision

Lagarde will hold a news conference at 2:30 pm in Frankfurt, 45 minutes after the ECB’s policy announcement.

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What Bloomberg Economics Says…

“The war in Ukraine is moving rapidly — too rapidly for the ECB to have a clear sense of how monetary policy should be altered in response at its next meeting on March 10. Bloomberg Economics expects the Governing Council to stick to the path it previously set out — at least for now.”

–Maeva Cousin, senior euro-area economist. Read the full note here.

Inflation hit a 5.8% last month — the quickest since the euro was introduced. It’s likely to push higher still, with penalties aimed at restraining Russia’s military campaign already including a US ban on its oil imports, and the Kremlin threatening to cut natural gas deliveries to Europe. Already-lofty energy prices have surged further.

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That’s why ECB officials broadly agree that the war will delay, rather than derail, the normalization of monetary policy — particularly as their measures of inflation become harder to interpret.

“Flexibility” was the watchword for policy makers even before Russia’s attack on its neighbor added to a hugely uncertain outlook. They may seek to expand their room for maneuver this week.

Current ECB guidance envisages ceasing asset purchases “shortly before” rate hikes can begin. While that sequence isn’t in doubt, the idea of ​​dropping “shortly” to allow a larger gap between the two steps is gaining traction.

“We need to retain optionality as to what we do and when — especially in this world,” Ireland’s Gabriel Makhlouf told Bloomberg last month. France’s Francois Villeroy de Galhau and Slovakia’s Peter Kazimir have backed similar suggestions.

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The move, if it happens, could push back investor bets on when rates will rise. Despite the US and the UK already being in tightening mode, money markets are currently pricing in a first quarter-point increase by the ECB in December because of the war on the euro area’s border.

In his final public remarks before this week’s meeting, ECB Chief Economist Philip Lane said the central bank “stands ready to take whatever action is needed to fulfill its responsibilities to ensure price stability and financial stability.”

He also hinted that support could stretch beyond policy makers’ existing toolkit, saying the Governing Council will also “consider, as needed, new policy instruments in the pursuit of its price-stability objective.”

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