The European Central Bank left its key interest rates unchanged, as expected, on Thursday and reaffirmed that it is set to end asset purchases in the third quarter.
The Governing Council, led by ECB President Christine Lagarde, left the main refinancing rate at zero, the deposit rate at -0.50 percent and the marginal lending rate at 0.25 percent.
“Looking ahead, the ECB’s monetary policy will depend on the incoming data and the Governing Council’s evolving assessment of the outlook,” the bank said.
The ECB expects inflation to remain high over the coming months, mainly because of the sharp rise in energy costs.
The bank said the incoming data since the last meeting reinforce the expectation that net asset purchases under the asset purchase program, or APP, should be concluded in the third quarter. Thus it confirmed the view from the previous meeting.
ING economist Carsten Brzeski said that it would now require a severe recession or a sharp drop in headline inflation forecasts for the ECB not to stop net asset purchases over the summer.
“In the current conditions of high uncertainty, the Governing Council will maintain optionality, gradualism and flexibility in the conduct of monetary policy,” the ECB said.
The forward guidance on interest rates was largely unchanged. The central bank said any adjustments to the key ECB interest rates will take place some time after the end of the Governing Council’s net purchases under the APP and that the move will be gradual.
The bank is widely expected to follow the Federal Reserve and the Bank of England in raising interest rates, later this year, amid runaway inflation. But the high uncertainty due to Russia’s invasion of Ukraine mar the growth outlook for Eurozone.
Policymakers stand ready to take whatever action that is needed to fulfill the price stability mandate and to maintain financial stability, the bank added.
Capital Economics continue to expect the ECB to end up moving a bit sooner and further this year than it currently anticipates.
“We have pencilled in three 25bp rate hikes for the second half of this year,” Andrew Kenningham, chief Europe economist at the research firm, said.
The minutes of the previous policy session in March revealed increased hawkishness among the Governing Council members. A large number of members held the view that the current high level of inflation and its persistence called for immediate further steps towards monetary policy normalization, the minutes said.
There were also concerns among policymakers that the latest staff projections may be underestimating the persistence of above-target inflation.
“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,” ING’s Brzeski added.
Eurozone inflation rocketed in March to set a new record of 7.5 percent as Russia’s invasion of Ukraine drove energy prices higher. Core inflation, which excludes prices of energy, food, alcohol and tobacco, accelerated to 3.0 percent.
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