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🏦🇪🇺Desk Commentary: ECB Monetary Policy Decision


  • The one 'dovish out' that the European Central Bank (ECB) left itself at Thursday's policy meeting was the potential to continue with net purchases in Q3, depending on how the impact of the Russia-Ukraine war unfolded.

  • In Q3, inflation might still be uncomfortably high for the ECB, but if the data and incoming information suggested demand was rolling over (or very likely to weaken), what was originally a policy stance geared towards containing inflation could become a policy stance aimed at coping with the risk of 'stagflation'.

  • The decline in the euro (EUR) on the day reflected a number of weak factors for the currency, including the evolving growth outlook, energy security risks and the trade balance fundamentals.


  • The bottom line of today's ECB decision was more hawkish than most observers had expected, CUBS Research take). Many took the statement to mean that regular asset purchases could end as soon as the end of June, meaning the July meeting could be 'liver for the first rate hike. President Lagarde though appeared to push back on that interpretation in the press conference, curiously contesting a journalist's characterization of the decision as an acceleration of normalization. Hence, investors came away confused and with a sense that views in the Governing Council had differed widely and that while the hawks have had the upper hand, the central bank might be lacking a clear plan.

  • The ECB communication today will not support the euro even if it is more hawkish than expected. There are too many questions, too many doubts as to whether the ECB has a clear plan/ concerns that things might not be kept under full control.

  • EURUSD dropping below the pre-statement levels is a clear sign that confidence has been hit by the ECB and markets are getting more worried.


  • Amidst the very foggy outlook, we maintain our call for the first 25bp rate hike to take place at the December meeting for now, followed by another one in March next year, but the timing is naturally subject to notable uncertainty in both directions. Hikes could easily start already in September, maybe even in July, if upside inflation surprises continue.

  • Lagarde specified in the press conference that the reference to some timecould mean anything from a week to several months. And from the June pace of EUR 20bn, net purchases could be concluded soon after, even at the end of June, if the ECB saw the need for quick action. Our best guess at the moment would be for the ECB to buy another EUR 10bn of bonds in July and conclude net purchases after that.

  • Today’s message suggests inflation worries have gained the upper hand at the central bank, even if the growth outlook has suffered at the same time.There were arguments in both directions, with some members preferring the ECB to do nothing, while others would have wanted the ECB to pledge to taper the net purchases without conditionalities.

  • Given the hawks’ desire to do something about the upside inflation risks, if the doves at the same time become more worried about financial stability considerations, the likelihood of the ECB changing its sequencing, i.e. that rate hikes can start only after net asset purchases have ended, has risen.


  • Compared with the latest adjustments to its monetary policy tools in December, this is a slightly more hawkish outcome. Back in December, the rotation from PEPP to APP would have lasted until October. Today's decision has brought forward the €20bn per month purchases by four months. But compared with the comments at and shortly after the ECB’s February meeting, today’s decisions are less hawkish than some market participants had expected. The reason for the change of heart is clear: the war in Ukraine has strongly increased the risk of stagflation in the eurozone.

  • All in all, today’s decisions are a good compromise, keeping maximum flexibility in a very gradual normalisation of monetary policy. A first rate hike before the end of the year is still possible. We will hear more about the ECB’s take on the latest developments and economic implications for the eurozone, including a new set of already outdated staff projections,


  • Not unsurprisingly, the ECB staff projections stressed the very uncertain outlook for both activity and inflation in the region which are highly dependent upon the unfolding Russian war in Ukraine. The impact of sanctions and other possible measures are seen as adding to the uncertainty.

  • Surging energy prices and downside impacts on confidence imply lower domestic demand. Together with the worsening prospects for Russia’s economy are profiled as weakening the Euro-zone economy. The ECB baseline scenario assumes only temporary disruptions to energy supplies and that energy prices will level off and gradually decline through the projection period

  • The main outcomes are to lower growth but lift inflation, though inflation is still expected to be close to or below target at the end of the projection period. Unemployment is not projected to fall below 7.0% now and ECB rates are expected to start rising into end 2022 (-0.4% from -0.5%) and rise to 0.7% (prior flat) into the end of the projection period.



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