ECB unexpectedly quickens stimulus exit citing Ukraine war

[FRANKFURT] The European Central Bank (ECB) unexpectedly accelerated its wind-down of monetary stimulus, signalling it is more concerned about record inflation than economic growth as Russia's invasion of Ukraine threatens to propel prices even higher.

Calling the war a "watershed" moment for Europe, the ECB will slow bond buying to 30 billion euros (S$45.1 billion) in May, then 20 billion euros in June, according to a statement on Thursday (Mar 10). Officials said they could halt the programme as soon as the third quarter.

The Governing Council tempered that message with new wording on the path of interest rates that points to less aggressive tightening prospects. While officials no longer suggest rates could go "lower" than at present, they also now say any hikes will be "gradual" and take place "some time after" the end of net bond purchases.

They previously said that would happen "shortly" after that. The euro reversed losses to trade little changed on the day around US$1.1077. German bonds erased gains, with yields rising nine basis points to 0.30 per cent. Money markets brought forward bets for ECB hikes, seeing a quarter-point rise in October versus December before the decision.

The decision defied the expectations of economists who anticipated a delay in major policy decisions to allow officials to better gauge the situation. Since Russia's invasion 2 weeks ago, president Christine Lagarde and her colleagues have been racing to evaluate how badly the 19-nation bloc will be affected by the effects of sanctions, trade disruptions and, above all, surging energy costs.

What looks certain is that the Kremlin's attack and the resulting advance for oil and natural gas contracts will drive inflation further beyond the current 5.8 per cent record. That makes it harder to provide support while keeping prices from spinning out of control.

Earlier Thursday, Goldman Sachs said euro-area economic output will shrink in the second quarter because of the war, with inflation likely to climb toward 8 per cent. Former ECB official Otmar Issing warned that a repeat of 1970s stagflation is "the biggest risk" facing the currency bloc.

Separately, policymakers also decided to extend a precautionary facility providing euros to central banks outside the currency bloc until Jan 15, 2023.

Before the meeting, several Governing Council members affirmed their commitment to ending large-scale asset purchases and negative interest rates, though indicated that plans to do so would probably be delayed. BLOOMBERG