Stocks fall as ECB signals intention to turn off money taps

ECB plans to stop pumping money into markets this summer, paving the way for an interest rates increase

Thu, 10 Mar, 2022 - 21:31

European stocks fell after the ECB surprised markets by accelerating its exit from pandemic-related stimulus.

The ECB said it will stop pumping money into financial markets this summer, paving the way for an increase in interest rates as soaring inflation outweighs concerns about the fallout from Russia’s invasion of Ukraine.

With price growth in the eurozone at a record high even before Moscow began its assault on February 24, the ECB was under pressure to at least stop adding fuel to the fire through its long-running asset-purchase programme.

While a handful of policy doves at yesterday’s ECB council meeting argued the war justified a pause for thought, they were outnumbered as worries about inflation, which hit a record 5.8% in February and is seen rising further, dominated the debate.

Russian attack 'a watershed for Europe'

ECB president Christine Lagarde said the invasion was a “watershed for Europe”, which would curb growth but boost inflation. “The Russia-Ukraine war will have a material impact on economic activity and inflation through higher energy and commodity prices, the disruption of international commerce and weaker confidence,” she said.

But the waning impact of the coronavirus pandemic on the economy, improved labour market conditions, and the prospect of an easing of supply chain bottlenecks all showed the eurozone was in fundamentally healthy shape, said Ms Lagarde.

While the ECB announced modest growth downgrades for this year and next, it ramped up inflation forecasts more strongly and now expected price growth of 5.1% this year, 2.1% next year and 1.9% in 2024.

This fulfils the only outstanding condition that the ECB has set for its first rate hike in over a decade, namely that inflation is seen stable at its 2% target. Commerzbank’s chief economist, Joerg Kraemer, said:

Since the ECB now sees its inflation target effectively achieved, it is likely to raise its key interest rate twice this year, by 25 basis points each time.

Eurozone bond yields soared and bank shares cut some losses on the ECB news.

But the German Dax and France’s CAC 40 fell almost 3% each, while Italy’s MIB lost 4.2%. The broader Stoxx-600 index slipped 1.7%.

Losses follow yesterday's optimism about peace talks

Motor industry stocks led losses in Europe, with BMW sliding 5.5% despite more than doubling pre-pandemic earnings in 2021.

The moves come a day after stellar gains for European bourses as Russia and Ukraine expressed willingness to talk.

But foreign ministers of the two countries have made clear that no progress had been made after the meeting as the war entered a third week.

European stocks hit record highs at the start of the year, with banks soaring as investors bet on a strong economy and tighter monetary policies globally. However, the Ukraine crisis upended the rally, driving the benchmark Stoxx-600 down over 12% so far this year.