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Market Extra: ECB to speed taper of bond buys as Russia’s invasion of Ukraine sparks stagflation fears

The European Central Bank on Thursday called Russia’s invasion of Ukraine “a watershed for Europe” and moved to speed the tapering of its asset-buying program in response to rising inflationary pressures.

In a statement following its policy meeting, the Governing Council said it would purchase €40 billion in assets in April, €30 billion in May and €20 billion in June. The ECB had previously planned to make purchases of €40 billion a month through the second quarter, scaling back to €30 billion in the third quarter and €20 billion in the fourth quarter.

“The reason for the change of heart is clear,” said Carsten Brzeski, global head of macro at ING, in a note. “The war in Ukraine has strongly increased the risk of stagflation in the eurozone.”

The ECB said the size of its net purchases for the third quarter would now be “data-dependent and reflect its evolving assessment of the outlook,” adding that if incoming data indicates the medium-term inflation outlook won’t weaken after the end of net asset purchases, it would conclude the program in the third quarter.

The ECB, as expected, left interest rates unchanged and said it expected them to remain at “present levels” until it sees inflation reaching its 2% target well ahead of its projection horizon. Previously, the ECB had said it expected rates to remain at “present levels or lower” under the same criteria.

“Extremely high energy and commodity prices, potential energy supply disruptions, weaker trade, new supply chain disruptions and a high degree of uncertainty for both companies and consumers have changed the eurozone’s economic prospects in only a few days,” Brzeski said.

The ECB’s moves will allow it to keep maximum flexibility “in a very gradual normalization of monetary policy,” the economist said. “A first rate hike before the end of the year is still possible.”

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