Euro Strength As ECB Signals Faster Stimulus
Thursday 10th March 2022 – 13:25 (GMT)
The European Central Bank (ECB) struck a slightly more hawkish tone following the conclusion of its latest 2 day meeting in Frankfurt earlier today. As expected, policymakers decided to leave the EU deposit facility rate unchanged at -0.5% and its marginal lending facility at 0.25%.
Slightly less expected was the central banks decision to speed up its asset purchasing programme (APP). Monthly net purchases will now amount to €40 billion in April, €30 billion in May and €20 billion in June – compared to €40 billion in the second quarter, €30 billion in the third quarter and €20 billion in the fourth quarter previously set.
Along with keeping key interest rates at record lows, policymakers added that any adjustments to the rates would take place after the end of the Governing Council’s net purchases under the APP. The euro immediately strengthened following the news as the potential for a rise during the third quarter of 2022 looks increasingly likely.
Many anticipated the recent conflict in the Ukraine could force the central bank to re-consider their post-pandemic strategy in order to shield the European economy from the wider effects of stagflation.
Behind the scenes, policymakers remain split on whether to tackle inflation sooner rather than later – with spiralling food and energy costs made worse in recent weeks due to the European reliance on Russian gas.
Oil is now trading near 14-year peaks, whilst wholesale gas pricing push fresh highs on an almost daily basis. Some analyst are warning the worst is yet to come, however many feel it’s unlikely that Russia will cut off their gas supply to Europe as it would be an unprecedented move – not seen even during the cold war.
Conversely, Goldman Sachs calculated a total shutdown of Russian gas supplies to Europe could cut eurozone gross domestic product by 2.8%. PGIM estimated the impact could be as much as 5% of GDP, raising the prospect of a third recession in two years.
ECB president Christine Lagarde was quick to signal it would keep a high level of monetary support for longer by promising “to take whatever action is needed” in response to the Ukraine crisis.