10 March 2022

Europe’s central bank to speed up end to economic stimulus

10 March 2022

The European Central Bank has said it will speed up ending its economic stimulus programmes to combat record inflation, even as concerns mount about the impact of Russia’s war in Ukraine on economic growth.

The bank said it will end its bond purchases in the third quarter but could modify that schedule if the inflation outlook changes.

Previously, it said it would taper them off to 20 billion euros per month by the last three months of the year and continue them as long as needed.

Inflation in the 19 countries that use the euro currency is running at an annual 5.8%, the highest since statistics started in 1997, and is expected to go higher due to rising prices for oil and gas stemming from the war.

Christine Lagarde, president of the European Central Bank (AP) (AP)

The bank also pushed a first interest rate increase further into the future, by dropping a promise that rates would go up shortly after the end of bond purchases.

It said in a statement that any rate changes will take place “some time after” the end of the bond purchases and “will be gradual”.

The purchases aim to keep borrowing costs low for companies and promote business investment and hiring.

The bank is ending a 1.8 trillion euro purchase programme this month and transferring some of the purchases to an existing programme that will now end sooner than planned.

The bank used the purchases to support the economy throughout the coronavirus pandemic and to keep long-term inflation on track to meet its target of 2%, assuming that high oil and gas prices and pandemic supply bottlenecks were temporary.

But that equation is changing as inflation seems to be both worse and longer lasting than originally expected.

Fears of oil and gas cut-offs have sent already high energy prices even higher, leading to predictions that inflation can only go higher in the short term.

On the other hand, economic growth is at risk in the eurozone because Europe is more exposed to the war on the continent and is more dependent on Russian oil and gas than the US and China.

Analysts are using the term “stagflation” to describe the combination of higher inflation and weaker growth.

It is a tough problem for any central bank because it pulls policymakers in two directions: taking steps to combat higher consumer prices could wind up hurting growth, and support for growth could worsen inflation.

Attention now focuses on bank president Christine Lagarde and her outlook for the economy at her news conference following the decision by the Frankfurt-headquartered bank.

The bank met before officials knew the outcome of a summit of European leaders, where a shared effort to support the economy through government spending could be discussed.

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