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View all search resultsEuropean central banks begin stimulus exit
The European Central Bank said it would wind down pandemic-era bond buys, and the Bank of England announced a rate hike.
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The European Central Bank (ECB) headquarters stands near electric vehicle charging spaces in a parking lot in Frankfurt, Germany, on Thursday, March 12, 2020. Christine Lagarde will bid to prevent the coronavirus outbreak from sparking a repeat of the 2008 financial turmoil when the European Central Bank finally unveils its monetary response to protect the region’s economy. Photographer: (Bloomberg/Alex Kraus)
T
he European Central Bank (ECB) on Thursday said it would wind down pandemic-era bond buys, moments after the Bank of England (BoE) hiked its key interest rate, as the two central banks seek to combat soaring inflation in Europe.
However, both banks also acknowledged that the Omicron variant of COVID-19, which has spread rapidly over the last month, posed downside risks to economic activity in the region.
ECB President Christine Lagarde said that the eurozone has "become better at coping with the pandemic waves", and that progress in the economic recovery "permits a step-by-step reduction in the pace of our asset purchases over the coming quarters."
Lagarde admitted that Omicron and the potential emergence of other variants created "extra uncertainty", and said the bank was ready to react to any "negative shocks".
The ECB's chosen course sets its apart from the United States (US) Federal Reserve, which is speeding up its stimulus exit and has flagged a number of rate hikes over the coming years to tame inflation.
In Frankfurt, the ECB confirmed the end of its 1.85 trillion euro (US$2.1 trillion) pandemic-era bond purchasing program (PEPP) in March 2022, and said it would start slowing the pace of purchases in the first quarter.
The pandemic emergency bond-buying program, currently hoovering up around 70 billion euros worth of assets every month, is the ECB's main crisis-fighting tool, aimed at keeping borrowing costs low to stoke economic growth.
To avoid an abrupt drop in its bond-buying in March, the ECB will ramp up its pre-crisis asset purchase program (APP) to soften the transition.
This would be increased in the second quarter to 40 billion euros, and reduced to 30 billion in the third quarter, the ECB said.
Purchases under the APP would continue thereafter at a pace of 20 billion euros "for as long as necessary" to support the ECB's goals.
"With today's decision, the ECB has entered into a very cautious tapering process," said ING economist Carsten Brzeski.
UK rate hike
The BoE on Thursday hiked its key interest rate from a record-low 0.10 percent to 0.25 percent, confounding market expectations for no change.
The decision came one day after UK inflation rocketed in November to 5.1 percent, more than double the BoE's 2 percent target.
The BoE's monetary policy committee voted 8-1 in favor of the first interest rate hike in more than three years, but unanimously decided to maintain quantitative easing stimulus, it said in a statement.
Policymakers deemed the hike "necessary" in order to return UK inflation towards its official target level, adding that consumer price inflation in advanced economies had risen by more than expected.
Rates were slashed to 0.1 percent at the start of the pandemic to boost Britain's lockdown-hit economy.
"Most members of the committee judged that an immediate, small increase in Bank Rate was warranted," read minutes from the gathering.
"Although the conditions for tightening set out in November had been met, the decision at this meeting was finely balanced because of the uncertainty around COVID developments."
They specifically noted the downside risks of the Omicron variant and the ongoing supply crunch to economic activity.
"The impact of the Omicron variant, associated additional measures introduced by the UK government and devolved administrations, and voluntary social distancing will push down on gross domestic product (GDP) in December and in the first quarter of 2022."
The BoE forecast that inflation would hold around 5.0 percent "for the majority of the winter period" -- and would peak at about 6.0 percent in April 2022 due to surging wholesale gas prices.
Diverging paths
The ECB underlined the "flexibility" of its monetary response, singling out Greece as a target for support, and Lagarde said that PEPP purchases could be resumed "if necessary" should the pandemic situation worsen.
The ECB also left its interest rates at historic lows, including a negative deposit rate that means lenders pay to park excess cash at the central bank.
Across the Atlantic, where the rise in inflation has been even steeper, the Fed announced Wednesday that it was doubling the pace of its withdrawal from asset purchases, bringing the end forward by several months.
Policymakers at the US central bank also indicated that they expected the Fed could raise its interest rates up to three times in 2022.
The possibility of the ECB following suit remains distant, with Lagarde reiterating that a rate hike was "very unlikely" in 2022, and in any case would only come after the end of the asset-purchasing schemes.
Inflation up
While the ECB has up to now described the inflation spike as "transitory", attributing it to one-off pandemic related factors, price rises in the 19-nation euro region has progressed at a rate that has exceeded observers' expectations.
In November, consumer prices rose 4.9 percent year on year in the eurozone, a record in the history of the single currency.
In the US, Fed officials have dropped talk of "transitory" inflation.
The Omicron variant has raised fears of more disruption, aggravating supply bottlenecks that have pushed prices up faster and hampered economic growth.
Recent pressure on prises, particularly energy costs, drove the inflation forecast "significantly higher" for 2022, Lagarde said, and well above the bank's two-percent goal.
The ECB said it expected prices to rise at a pace of 3.2 percent next year -- up from September's forecast of 1.7 percent, its largest ever upwards revision.
Inflation was set to come in at 2.6 percent in 2021, before stabilising at 1.8 percent in 2023 and 2024.
Former International Monetary Fund chief Lagarde said there was "possibly an upside risk" to inflation running higher still over the medium term.
For growth, the ECB lowered its expectations for 2022 to 4.2 percent from 4.6 percent, before slowing to 2.9 percent in 2023 and 1.6 percent in 2024.
