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ECB to assert faster stimulus exit on inflation: policy guide

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The European Central Bank is poised to maintain its faster withdrawal of stimulus as it prioritizes stemming relentless inflation over mounting risks to the continent’s economy from the war in Ukraine.

The Board of Governors is likely to refrain from making major decisions when it wraps up a meeting in Frankfurt on Thursday. Bundesbank chief Joachim Nagel said the June meeting, where new projections are expected to shed more light on the implications of the Russian invasion, will determine the next steps for monetary policy.

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Since officials unexpectedly unveiled a faster outflow of billions of euros in asset purchases last month, inflation has soared to 7.5%, almost four times its target. It may not peak until mid-year, according to chief economist Philip Lane.

But with business and consumer confidence already plunging, further price pressures are looming in the form of a possible European Union ban on Russian energy that could also trigger recessions in countries like Russia. Germany, where import dependency is high.

Follow our live blog on ECB decision day here.

Concerns about possible stagflation are dismissed, for now. And despite the divisiveness over how quickly to normalize policy, there is a consensus among ECB officials that bond purchases should be scaled back and interest rates should be raised from their lows. records – as is already happening in the US and UK.

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President Christine Lagarde could say more about the stimulus debate during her press conference at 2:30 p.m. in Frankfurt. She is also likely to be asked about a new crisis tool being prepared to control eurozone bond yields when quantitative easing ends.

What Bloomberg Economics says:

“Lagarde signaled in March that the Board of Governors intends to maintain the course of monetary normalization, despite the war in Ukraine. Bloomberg Economics expects it to reiterate this position at its next meeting,”

–David Powell, Senior European Economist. For a full analysis, click here

The ECB will announce its decisions 45 minutes before Lagarde’s speech, at 1:45 p.m. Here’s how she’s likely to handle individual political issues.

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Asset purchases

Officials are likely to stick to the end date of the third quarter of the ECB’s long-running asset purchase program, although a report from the March meeting revealed tensions as some pushed to a firm cut in the face of record inflation.

With policymakers continuing to stress the importance of flexibility and optionality, a more precise timeline is unlikely to be formalized. But Lagarde can give a clue as to whether the Board of Governors is leaning toward an earlier or later end.

Net purchases of bonds under an emergency pandemic program ended in March. There may be an update on plans to reinvest maturing debt proceeds.

Price increase

Concluding asset purchases is key to determining when the deposit rate can be raised by -0.5% – where it has been since 2019. Under the agreed sequence, borrowing costs will only rise after the end of bond purchases, thus stopping earlier in the third quarter. would open the door to a hike in September.

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This corresponds to the suggestions of the most hawkish members of the board. Markets forecast an end to negative rates this year, although economists polled by Bloomberg only see a take-off in December via a quarter-point hike.

Market stress

The ECB is designing an instrument to deploy if the bond yields of weaker eurozone economies rise excessively, according to people familiar with the plan. Lagarde had previously said that new tools could be developed to counter such a threat, without providing details.

It is probably too early for an announcement as work is in its early stages. In the meantime, as soaring energy costs and growing security threats worsen the backdrop for governments, the ECB can rely on reinvestments from its pandemic purchase program.

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