(Bloomberg) -- The European Central Bank renewed its pledge to end bond-buying in the coming months, as record inflation raises the odds it will also lift interest rates for the first time in more than a decade before the year is out.
The Governing Council reiterated Thursday that it will halt net asset purchases in the third quarter -- an accelerated timeline agreed on last month with consumer prices now surging at almost four times the 2% target. It reaffirmed that “gradual” rate hikes will follow “some time after.”
“Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs,” the ECB said in a statement. “The Governing Council will take whatever action is needed to fulfill the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability.”
Money markets trimmed ECB tightening bets, pricing quarter-point rate hikes in September and December. German bonds rose, sending the 10-year yield one basis point lower to 0.75% after earlier climbing to 0.83%.
While still well behind the Federal Reserve and the Bank of England in raising borrowing costs, the faster timetable for withdrawing stimulus underlines the ECB’s focus on taming price pressures -- stoked by the war in Ukraine -- over risks to the pandemic rebound in the 19-member euro zone.
But with Russia’s invasion complicating the task of forecasting, policy makers are likely to maintain flexibility by awaiting new projections in June before cementing an end-date for asset purchases. Economists predict the ECB will eventually select July as the cutoff and expect rate liftoff in December.
Some ECB officials back a similarly tough approach, though others fret that a steadier pace is needed as the conflict saps confidence and the prospect of a ban on Russian energy threatens recessions for economies such as Germany’s -- Europe’s largest.
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President Christine Lagarde may offer some insight on how that debate is shaping up when she holds a news conference at 2:30 p.m. in Frankfurt.
She’s also likely to be asked about behind-the-scenes preparations for an instrument to deploy if the bond yields of weaker euro-area countries jump excessively as quantitative easing is phased out.
The ECB’s staff is designing a backstop that would be available for the Governing Council to tackle shocks outside the control of individual governments, people familiar with the plans told Bloomberg last week, though it’s unclear what the tool would look like.
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