ECB confirms plan to end bond buys as Ukraine war boosts inflation

Major central banks including the Federal Reserve are laying plans for the most aggressive cycle of interest-rate increases in decades, with sweeping implications for global asset prices. Policy makers are eager to remove pandemic-era stimulus measures to regain control over inflation, which has surged to multidecade highs around the world.

The ECB said in a statement that recent economic data made it more likely that the bank would end its net bond purchases in the third quarter. It said it would reduce its net bond purchases steadily, from €40 billion, equivalent to $43.6 billion, in April to €30 billion in May and €20 billion in June, confirming earlier plans.

Investors turned to President Christine Lagarde’s news conference for clues about how soon the ECB might start to increase its key interest rate. That rate is currently set at minus 0.5% and has been below zero for almost eight years.

The war threatens to boost inflation and weaken growth in Europe, which relies heavily on energy imports from Russia. The conflict is sending raw-material and energy prices soaring, and hurting consumer and business confidence. It has also disrupted already-strained global supply chains, which are crucial for Europe’s large export-oriented manufacturers.

This creates a dilemma for ECB officials, who need to contain inflation that hit a record of 7.5% in March without derailing the recovery.

The eurozone economy hasn’t fully recovered from the pandemic and, besides the war, is facing political uncertainty related to next week’s presidential elections in France, when far-right candidate Marine Le Pen will face off against President Emmanuel Macron. Highlighting the uncertainty, borrowing costs have been rising strongly for indebted Southern European governments like Italy’s.

So far the ECB has moved more cautiously than other major central banks, which have already increased interest rates. ECB officials have signaled that they would end their giant bond-buying program soon and could start to increase interest rates later this year if inflation doesn’t abate. While the ECB is still hoovering up tens of billions of dollars of eurozone debt each month, Fed officials have signaled they could start to reduce their bondholdings starting in May. Analysts say there is too much uncertainty and too little hard economic data on the impact of the war for the ECB to act yet.

The eurozone’s gross domestic product growth rate is likely to slow to 3% this year as higher energy prices significantly affect inflation and real incomes, Fitch Ratings said Wednesday, reducing an earlier estimate of 4.5% growth. Eurozone inflation is likely to average 5% this year, Fitch said, more than double the ECB’s target of 2%.

Central banks in Canada and New Zealand both announced 0.5-percentage-point rate rises on Wednesday. Fed officials voted last month to raise the benchmark federal-funds rate by a quarter percentage point to a range between 0.25% and 0.5%, and penciled in six more increases by year’s end, the most aggressive pace of rate increases in more than 15 years.

Policy makers are eager to avoid the mistakes of the 1970s, when central banks kept borrowing costs low despite a surge in oil prices, allowing inflation to spiral out of control.

“The 1970s teach us how dangerous it is when central banks do not focus on maintaining price stability but allow themselves to be harnessed by governments for other goals," said Joerg Kraemer, chief economist at Commerzbank in Frankfurt. “In this respect, it is worrying that the ECB is particularly eyeing the southern member states, which want low interest rates to be able to service their high debts more easily."