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ECB says to end bond-buying in Q3

The European Central Bank said on Thursday it would end asset purchases in the third quarter, accelerating its exit from extraordinary stimulus as soaring inflation outweighed concerns about Russia’s invasion of Ukraine.

The move surprised some investors who had expected the ECB to keep its options open until there is more clarity about the impact of the war on the euro zone economy.

Euro zone bond yields and the euro shot up after the statement, with Germany’s two-year yield, which is sensitive to interest rate expectations, up 17 bps to -0.36% as traders ramped up bets on ECB rate hikes. .

Here are some comments from analysts on the statement:

MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON
“It’s a marginal surprise. We had an indication in the past week that the ECB could signal the exit from QE.

“In the press conference, (ECB President Christine) Lagarde is likely to stress that it’s one step at a time and they will be flexible. As things stand there is a path to end QE but that’s not an indication of rate hike soon after.

“For the time being they are choosing to look through some of the uncertainty created by the war. The more immediate impact will be the rise on inflation and we could get inflation above 6%, which means the risks of entrenched inflation expectations.

“So, they are focusing on upside inflation risks and not the downside risks to growth for now but that’s not set in stone.”

CHRIS SCICLUNA, HEAD OF RESEARCH, DAIWA CAPITAL MARKETS
“Well it’s feasible that they end asset purchases in Q3 but not a done deal and is data dependent. It is possible we get to Q3 and the economy is sliding into recession.

“Clearly the inflation outlook is not good and the statement suggests the ECB expects inflation to stay above target. But it might be the case that they don’t end net asset purchases in Q3 if the economy turns.

“The statement was more hawkish then markets had priced in, which is why we have had a significant widening of BTP spreads.

“The ECB has also given itself more wiggle room by suggesting rates will not rise soon after asset purchases end.”

SEEMA SHAH, CHIEF STRATEGIST AT PRINCIPAL GLOBAL INVESTORS
“A faster winding down of the asset purchase program will perhaps come as a surprise to market participants who expected an ECB capitulation in the face of weaker growth forecasts. Yet, with inflation still drastically above their target, it is important that the ECB retains an air of unwavering commitment to price stability.

“However, make no mistake, if the conflict is prolonged and elevated energy prices weigh heavily on household consumptions and confidence, the ECB will find it immensely tough to raise rates this year. Who would want to be a central banker in this situation?”

TD SECURITIES
“We got the hawkish pivot that we had been expecting from the ECB today, with an announcement today that the APP programme will wind down relatively rapidly. This is much more aggressive than many had assumed–indeed, it echoes broad expectations before the war in Ukraine, and suggests that despite the potentially severe hit to euro area growth in the coming months, the upside risks to inflation still dominate GC’s minds.

“The ECB announcement is helping to reinforce the tactical recovery of the euro. We think positioning and valuations are significant knee-jerk drivers, given the market has been leaning dovish.

BRAD BECHTEL, GLOBAL HEAD OF FX, JEFFERIES, NEW YORK:
“Central banks are having to focus on the inflation mandate and they see rising pressures as a real problem. The prints in Norway are a proof of that.

“There is still a tremendous amount of stimulus left in the system and policymakers are effectively starting from the zero lower pound when it comes to policymaking. So this is a strong signalling device. Even if the military action ends quickly, the ECB will be grappling with an inflationary surge for a few months and this is the appropriate stance to take.”

SUSANNAH STREETER, SENIOR ANALYST HARGREAVES LANSDOWN
“It’s clear that the ECB sees the escalating price pressures too hard to ignore, and trying to keep a lid on inflation is its number one priority.”

“The fact that ECB is going to discontinue its net asset purchases does show this willingness to still try and take more baby steps to keep a lid on inflation rather than moving in immediately like Federal Reserve and the Bank of England.

“What they’ve said today is not really going to move the dial much because they haven’t really made any rapid changes.”
Source: Reuters (Reporting by EMEA markets and finance team)

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