© Reuters. FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – European Central Bank policymakers remain open to accelerating their exit from bond buys even as the war in Ukraine raises uncertainty, and their biggest debate may be whether to put a firm end-date on the stimulus scheme, sources told Reuters.
With inflation pressures building faster than expected, the ECB had been all but certain to signal the end of bond purchases at its March 10 meeting. But the war in Ukraine has thrown those plans into turmoil, prompting policymakers to reassess the outlook.
Six sources close to the discussion say that a faster exit is still necessary as inflation could be around double the ECB’s 2% target this year, with even medium term inflation at risk of overshooting.
“Inflation is higher and broader. And it’s no longer just energy, but food prices, too,” one of the sources, who asked not to be named, told Reuters. “It would be inappropriate not to act on this.”
Russia and Ukraine are both major grain exporters and the conflict risks pushing up food price inflation further.
Inflation projections have been notoriously inaccurate in recent quarters so policymakers may put greater weight on current readings, including the February figure, due next week, the sources added.
An ECB spokesperson declined to comment. At a news conference on Friday, ECB chief Christine Lagarde said it was premature to speculate about the March decision as policymakers will decide based on data available to them at the time.
The problem is that, while temporary, high inflation could seep into the broader economy, lifting wages and prices, entrenching high consumer price growth.
The ECB was already due to cut its bond buying over the coming quarters but aimed to keep the purchases open-ended.
An end-date is crucial, however, as it has implications for any interest rate hike. Since the bank has signalled there will be no rate increase before the bond buys end, indefinite purchases also push out the timing of any rate hike.
“One option would be to signal our intent to end the bond buys in the third quarter but not make a firm commitment,” a second source said.
This is likely to be a sticking point as policymakers in the dovish camp argue for “flexibility and optionality”.
“I bet the end date will be the biggest debate, I think that’s still an open issue,” a third source said.
The sources agreed the ECB should make no commitment on rate hikes.
They also said policymakers are likely to agree in March on loosening the link between bond buying and any rate move. The bank’s current guidance is that bond buys will end “shortly before” an interest rate rise.
The “shortly” may create undue expectations and tie the ECB’s hand so it could be dropped, the sources said.
Source: Investing.com
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