Euro Area: ECB sticks to gradual normalization path in April

Euro Area Monetary Policy April 2022

Euro Area: ECB sticks to gradual normalization path in April

At its meeting on 14 April, the European Central Bank (ECB) made no changes to its main monetary policy instruments. It confirmed that it expects net asset purchases as part of its asset purchase program (APP) to conclude in Q3, with net purchases totaling EUR 40 billion in April, EUR 30 billion in May and EUR 20 billion in June. The ECB had already concluded the net purchases of its other main quantitative easing program—the pandemic emergency purchase program (PEPP)—at the end of March. Meanwhile, the ECB kept rates on the main refinancing operations, the marginal lending facility and the deposit facility at their respective all-time lows of 0.00%, 0.25% and minus 0.50%.

The move came as a surprise to some investors, driving the euro down to its lowest level against the dollar since May 2020. Inflationary pressures have continued to mount, as Russia’s invasion of Ukraine is further stoking energy and food cost inflation. Furthermore, price rises have become more widespread amid the reopening of Eurozone economies following Covid-19 restrictions and protracted supply bottlenecks. ECB Governor Christine Lagarde acknowledged in a press conference that upside risks to inflation have “intensified, especially in the short term”. Conversely, the Governor also noted that downside risks to growth have “increased substantially”, likely pushing the ECB to maintain its gradual approach to normalizing its monetary policy stance. Economic momentum is being suppressed by the war in Ukraine, higher commodity prices and supply chain difficulties. Expansionary fiscal stances, accumulated savings, and healthy labor markets could be somewhat offsetting these drags on activity.

The Bank’s guidance remained broadly unchanged; it reiterated that rates would only change “some time” after the end of net purchases under the APP and that any changes would be “gradual”, leaving the door open for a possible interest rate hike this year.

Commenting on the ECB’s decision, Carsten Brzeski, global head of macro at ING, noted:

“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. It will now take an unprecedented eight weeks until the next ECB meeting (six weeks is normal). A lot can happen until this June meeting. But with another round of macro projections in June and remembering that in these times of high uncertainty the ECB will always try to link crucial decisions to new macro projections, we expect the ECB to stop net asset purchases in July and start hiking interest rates in September. […] It will be normalisation at a snail’s pace.”

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