‘Hawkish’ ECB speeds up the winding-down of QE as it leaves interest rates unchanged – TS&W’s Sarah Giarrusso comments

The European Central Bank (ECB) left interest rates unchanged at its March monetary policy meeting yesterday. It left the benchmark refinancing rate at 0%, the rate on its marginal lending facility at 0.25% and the rate on its deposit facility at -0.5%.

However, the ECB announced a faster-than-expected reduction of quantitative easing, with changes to the Asset Purchase Programme. Now, monthly net purchases of €40bn will be made in April, €30bn in May and €20bn in June. From the third quarter onwards the amount of asset purchases will be “data-dependent”.

Asset purchases under the pandemic emergency purchase programme will be discontinued at the end of March 2022.

Sarah Giarrusso, Investment Strategist at Tilney Smith & Williamson comments:

The statement from the ECB struck a hawkish tone by pledging to end net asset purchases under the APP sooner than had been announced at previous meetings as the Bank grapples with persistent inflation. The ambiguity of the wording around the calibration of the asset purchases in the third quarter means the programme could be wound down in relatively short order.

This would pave the way for the first interest rate hike from the Bank which is expected to come at the end of this year.

However, there was a subtle dovish change in the statement regarding interest rates. Previously the ECB has stated the APP would come to an end “shortly before” an interest rate hike, which has been adjusted to state that interest rate hikes will come “sometime after” the end of the APP.

In the face of so much uncertainty as the war in Ukraine rages on the ECB is allowing some optionality when it comes to the monetary policy response. The Governing Council has a difficult task in balancing inflation (currently at 5.8%, annualised, well above the 2% target) with growth, which could be hindered by the war in Ukraine.

The ECB could tread cautiously over the coming months, however, it is not likely stray from expected path of tightening policy to bring inflation back down to target. Money markets are expecting the first interest rate rise to occur in the second half of 2022 and our view that we are heading into a rising interest rate environment in Europe has not changed.