ECB plans to phase out stimulus sooner than expected

The European Central Bank said it would aim to phase out its large bond-buying program by September, sooner than expected, taking a key step toward raising interest rates to contain surging inflation despite the shock of war in Ukraine.

The ECB said in a statement that it would keep its key interest rates on hold but paved the way for increases before the end of the year. Any rate rises will take place “some time" after the end of the bank’s bond-buying program and will be gradual, the ECB said.

Taken together, Thursday’s actions signal a determined move away from the ultra-easy monetary policies that the ECB introduced in recent years. They reflect mounting concerns about inflation, which is close to 6% in the eurozone.

Major central banks including the Federal Reserve have signaled they want to start raising ultralow interest rates to keep a lid on inflation that has touched multidecade highs on both sides of the Atlantic.

The war has complicated those calculations, especially in the eurozone, which borders both Russia and Ukraine. The bloc’s deep trade relations with Russia include sizable exports and a heavy reliance on Russian oil and gas supplies, crucial for the region’s large industrial sector.

However, the ECB’s actions suggest it is focused on inflation, which is likely to rise as energy prices soar.

Eurozone bond yields rose after the announcement, with German 10-year bund yields climbing to 0.280%, from 0.206% Wednesday. Italy’s 10-year bond yield jumped to 1.899%, from 1.677%. Yields climb when bond prices fall.

The euro, meanwhile, reversed earlier losses and turned higher, climbing 0.1% to $1.1082. Losses in European stock indexes accelerated. The pan-continental Stoxx Europe 600 fell 2%, while Germany’s DAX index slid 3.3%.

Ending the bond-buying program would draw a line under a key stimulus tool that has been in place for much of the past seven years. The ECB said purchases under the program would amount to €40 billion, equivalent to $44 billion, in April, €30 billion in May and €20 billion in June. The purchases will end in the third quarter provided that “incoming data support the expectation that the medium-term inflation outlook will not weaken," the statement said.

The Ukraine conflict is a stagflationary shock for Europe. It heightens the risks of a new recession by curbing European exports, straining supply chains and driving up energy and commodity prices for households and the region’s large manufacturing sector. It is also likely, in the short term, to push up eurozone inflation which, at 5.8% in February, is already almost three times the ECB’s 2% target.

European stock markets have declined far more than their U.S. counterparts over the past month, and the euro has fallen against the dollar, adding to the inflationary pressures.

In the U.S., Fed Chairman Jerome Powell told congressional officials last week that he would propose a quarter-percentage-point interest-rate increase at next week’s meeting, effectively ending speculation over a larger, half-percentage-point increase.

President Christine Lagarde had signaled in February, before the Ukraine war began, that the ECB might start to increase interest rates later this year. Even before the conflict, Europe’s economic recovery had less momentum than that of the U.S., partly because of lower government spending.

New ECB staff economic forecasts, published on Thursday, are likely to show lower economic growth and higher inflation.

European Union leaders could unveil fresh government spending plans when they gather Thursday and Friday at Versailles, outside Paris, to discuss their response to Russia’s aggression against Ukraine.

This story has been published from a wire agency feed without modifications to the text