ECB sticks to plan for gradual tightening of monetary policy

The European Central Bank on Thursday stuck to its gradual timetable for winding down bond purchases in the third quarter without putting a firm date on when it will raise interest rates despite record-high euro zone inflation.

Policymakers on the central bank’s governing council, who met this week in Frankfurt, face a dilemma of how drastically to tighten monetary policy in response to record inflation while the risk grows of a sharp economic downturn caused by the fallout from Russia’s invasion of Ukraine.

The ECB kept its main policy rate unchanged at minus 0.5 per cent and repeated its statement that the “calibration of net purchases for the third quarter will be data-dependent and reflect its evolving assessment of the outlook”.

“How the economy develops will crucially depend on how the [Ukraine] conflict evolves, on the impact of current sanctions and on possible further measures,” the ECB said.

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Inflation increased

“Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs,” it said, adding that in light of the uncertainty it would “maintain optionality, gradualism and flexibility in the conduct of monetary policy”.

Markets are pricing in an increase in the ECB’s deposit rate back above zero by the end of the year and to almost 1.5 per cent by the end of next year. But the central bank said any rate rise would be “gradual” and would only take place “some time” after it stops net bond purchases. – Copyright The Financial Times Limited 2022