Euro Falls Even though ECB Signals Acceleration of Stimulus Reduction

It seems that the ECB cannot rule out the threat of uncontrolled inflation due to war. A stimulus reduction plan was also put forward.

The European Central Bank (ECB) announced that it will advance its plan to reduce monetary stimulus from the end of 2022 to the third quarter of 2022. This indicates increasing concerns about rising inflation amid weak economic growth due to the Russian invasion.

War has the potential to push up price increases. The ECB even said that the European economy is now starting to be on the edge. Therefore, the ECB is committed to slow down the purchase of bonds starting next May, and complete it in the third quarter. Nevertheless, the central bank has signaled that an increase in interest rates will not necessarily follow monetary tightening.

"The Board of Governors considers that inflation will be more likely to stabilize at 2% in the medium term," said ECB President Christine Lagarde in a press conference in Frankfurt tonight (10/March). "A war in Ukraine is a risk of a substantial increase (inflation), particularly to energy prices."

The announcement defied the expectations of economists who had predicted that the ECB would delay making important decisions this month, wanting to observe the impact of Russia's invasion of Ukraine first. Several members of the ECB meeting also indicated indications of ending large-scale asset purchases and postponing negative interest rates.

EUR/USD actually weakened

Moments after the ECB's announcement, the euro had soared. But soon, the currency receded again. The reason is, market players feel they still have to digest the ECB's policy again today. EUR/USD is down 0.61% to 1.1005 at the time of writing.

"From the ECB, we got what we expected. Everyone knows that the Russia-Ukraine situation is creating a degree of uncertainty. However, the core problem remains in removing the extension of monetary policy accommodation that has been built several years ago," said Bipan Rai, analyst at CIBC Capital Markets. "From a forex standpoint, we feel like we are expecting too much at the (ECB) meeting."

Regardless of the ECB's policy, the euro's decline tonight was not as sharp as before because it was supported by the issue of joint bond issuance. The ECB may do this to finance rising energy prices and additional spending budgets during the Russia-Ukraine conflict.