ECB Officials Signal Ukraine May Delay, Not Derail Stimulus Exit

(Bloomberg) --

The repercussions of Russia’s invasion of Ukraine may delay but not stop the European Central Bank’s stimulus exit this year, according to officials scrambling to assess the potential damage to the region’s economy.

“It’s clear that we’re moving toward normalizing monetary policy,” Austrian governor Robert Holzmann, one of the most hawkish members of the ECB’s Governing Council, told Bloomberg in Paris on Thursday. “It’s possible however that the speed may now be somewhat delayed.”

His views were echoed by officials from at least two other central banks who spoke on condition of anonymity, saying that while the invasion doesn’t fundamentally change the outlook for the euro-zone economy, it may slow the ECB’s decision to unwind its ultra-loose monetary policy. The central bank said it will conduct a “comprehensive assessment of the economic outlook” at its March meeting.

Russia’s dramatic escalation battered markets, sending oil prices above $100 a barrel for the first time since 2014. The surge in commodity prices will likely compound an inflationary shock ripping through the global economy. Even before the crisis, euro-area inflation had unexpectedly climbed to a record 5.1% in January.

But the invasion also carries risks to growth that highlight the balancing act central bankers now face. 

Over the past weeks, officials said next month’s meeting could see a decision on how fast the ECB could end its asset purchases program, with suggestions raging from as early as the second quarter to as late as the end of 2022. A growing number of policy makers were also conceding that interest rates will likely need to rise late this year in the face of a stronger inflation outlook.

Holzmann, who earlier this week said he backed two rate hikes this year, struck a cautious tone on recent events.

“Uncertainty undoubtedly increased due to developments in Ukraine,” he said. “We will analyze carefully how strongly the economy will be affected.”

European government bonds extended their gains after the comments. Traders also trimmed bets on the extent of policy tightening expected in 2022. 

The need for a gradual withdrawal of stimulus was also apparent in comments by Irish central bank governor Gabriel Makhlouf.

On the eve of Russia’s invasion, he said officials would probably be able to proceed with a decision on ending bond purchases, while giving themselves more time to decide on rates.

“It’s entirely possible that in March we can make decisions as to what happens to the asset purchase program,” he said in an interview. “I don’t personally feel that I could tell you what’s going to happen to interest rates, and when. I’d prefer to have a bit more options open to me as we go.” 

A spokesperson for the Irish central bank said Thursday morning that his comments still stand. 

Investors still consider a rate hike this year likely, but pared bets for the size of such a move on Thursday. They now see around 37 basis points of tightening by year-end compared to 45 basis points Wednesday.

Isabel Schnabel, an ECB Executive Board member, also warned that the shock of war hanging over Europe has “clouded the global outlook.” 

While stressing that her Thursday speech reflected the situation “predating the war,” she argued that the “inflation outlook has firmed since the start of the year and inflation pressures have broadened and become more persistent.”

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