LONDON (Reuters) – The European Central Bank stuck to plans on Thursday to finally end its stimulus programme in the third quarter but gave no further clues on its schedule, stressing uncertainties linked to the war in Ukraine as well as the path of inflation .
Market reaction:
Euro zone bond yields fell after the policy statement, with German two-year bond yields falling more than 10 bps on the day.
The euro slipped into negative territory, down 0.8%
Money markets also trimmed expectations of rate hikes by the end of the year.
Here is a summary of analyst comments:
ANNA STUPNYTSKA, GLOBAL MACRO ECONOMIST, FIDELITY INTERNATIONAL:
“Recession in Europe is already our base case, but its magnitude and duration crucially depend on the nature of further sanctions on Russia. As a full energy embargo is becoming more likely, so is the worst-case recession scenario.
We believe as the growth shock becomes more evident in the data over the next few weeks, the ECB’s focus will likely shift away from high inflation towards trying to limit economic and market distress as the invasion of Ukraine and its consequences continues to ripple through the system.
Contrary to market pricing, we do not expect the ECB to hike rates until Q4 this year or early 2023.”
CARSTEN BRZESKI, GLOBAL HEAD OF MACRO AT ING:
“Interest rates remain unchanged, and there was no new hint at the future path of rates. To probably tackle the recent debate on how the ECB could deal with widening bonds spreads and rumours about a new asset purchase programme, the ECB stressed that the reinvestments of the Pandemic Emergency Purchase Programme could be used to tackle market fragmentation.”
“Europe is different and the ECB is different. Instead of any panic reaction, the ECB continues with its very gradual normalisation, which in our view is bringing an end to net asset purchases over the summer and an end to the era of negative interest rates before the end of the year.”
KENNETH BROUX, FX STRATEGIST, SOCIETE GENERALE, LONDON:
“The knee-jerk pullback in the euro/dollar suggests some were positioned for something more hawkish from the European Central Bank.”
MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS:
“It was a more dovish press conference than markets were expecting. Inflation has overshot their projections and we should get an upward revisions in June, and they are comfortable in winding down QE.”
But beyond that, they are not ready to push policy further.
A big part of the press conference was focused on the deteriorating outlook and the hit to confidence triggered by the war in Ukraine. There’s also concern about a tightening in monetary conditions, so there is a sense that markets are tightening policy in the absence of the ECB doing it and that could choke off the recovery.”
STEVE RYDER, SENIOR PORTFOLIO MANAGER, AVIVA INVESTORS GLOBAL SOVEREIGN BOND FUND:
“Downside risks to growth are increasing and uncertainty around Ukraine and the impact on inflation will continue to weigh on confidence. With markets already pricing a significant degree of rate normalisation we see the rate outlook from here as much more balanced.”
STUART COLE, CHIEF MACRO STRATEGIST, EQUITI CAPITAL, LONDON
“We have had confirmation that the asset purchase programme will end in Q3. That leaves open the possibility of an interest rate rise being delivered before year-end and accordingly market expectations of a first hike coming in December are likely to firm.
“But they are also keeping open the possibility of providing more support if needed, noting that the PEPP can be restarted in the event of another COVID crisis – and you can probably add to that if the economic fallout from the Ukraine war turns out to be worse than anticipated.”
(Reporting by London Markets Team; Compiled by Saikat Chatterjee)
