​ECB Announces it's Normalisation Plan

The European Central Ban announced how it will reduce QE in the coming months. Net asset purchases will  be reduced to €20bn per month in June rather than in October giving us a very gradual normalisation of monetary policy and provides the ECB with a lot of flexibility.​

​It also keeps the door open for a rate hike before year-end, particularly given the current high levels of uncertainty. The bank confirmed the end of its Pandemic Emergency Purchase Programme (PEPP) by the end of March and also confirmed the previously announced increase in the Asset Purchase Programme (APP) to €40bn per month from the current €20bn. In May, the APP purchases will be reduced to €30bn and in June to €20bn.

Compared with changes to its monetary policy in December, this announcement carries a more hawkish tone. With this announcement, the ECB have brought forward the €20bn per month purchases by four months. So what has caused this change in monetary policy?

One reason could be the spectre of stagflation that is lurking in the shadows. The war in Ukraine seriously increases the risk of stagflation coming out of the shadows in the eurozone. As a result of the war, we've seen a lot of factors thrown in to the economic melting pot, such as extremely high energy and commodity prices, potential energy supply disruptions,  supply chain disruptions, weaker trade conditions and a high degree of uncertainty for both companies and consumers. This has changed the eurozone’s economic prospects in recent days and weeks.

In summary, today's announcement shows a cautious approach to normalisation of monetary policy. However, this still leaves the possibility of a first rate hike before the end of the year. Watch this space as we hear more from the ECB.