'ECB must continue to buy bonds due to turmoil in Ukraine'

The ECB should continue to buy government bonds this year to protect the market from the negative impact of the conflict in Ukraine. Also, the central bank should not attach an end date to its bond-buying program. ECB policymaker Yannis Stournaras said this in an exclusive interview with Reuters. This makes him the first within the ECB to speak out on the consequences of the Russian invasion of Ukraine on monetary policy. Until recently, the central bank was still planning to taper its bond-buying program due to high inflation in the eurozone.

The president of the European Central Bank, Christine Lagarde, is under increasing pressure to tighten monetary policy. Indeed, inflation in the euro area is at 5%, well above the 2% medium-term target. In some euro countries, including the Netherlands, prices are even rising by more than 7%. Lagarde acknowledges that inflation is currently very high, but believes that it will be temporary. Moreover, the main causes - high energy prices and logistical problems - are beyond the control of monetary policy. "We can't fill a pipeline with gas or train extra truck drivers"so Stated Lagarde recently appeared in the European Parliament.

'ECB must continue its asset purchase programme'

High inflation is a problem, but according to central banker Stournaras, it is secondary to guaranteeing financial stability. Therefore, the ECB must take its plans for a rate hike off the table. He also believes that the ECB should continue its bond-buying programme for the rest of this year. However, the market expects Lagarde to announce an end date for the asset purchase program at the next press conference on March 10.

"Looking at the situation as it is today, I would prefer to continue the asset purchase program at least until the end of this year. So also until past September. I would not be in favor of announcing an end to the bond-buying program in March," Stournaras said. He also expects that high inflation will come to an end on its own. He is convinced that deflationary forces have prevailed in the eurozone for some time. "In the medium term, I expect the consequences to be deflationary due to the negative impact on trade and rising energy prices."

Buy-back program

The ECB said in December that it would continue its bond-buying programme until at least October, followed shortly thereafter by the first interest rate hike. The market expects the central bank to raise its deposit rate by fifty basis points to 0% this year. Currently, banks pay 0.5% interest to park deposits with the ECB. This interest rate was based on the market interest rate for long-term government bonds, the interest rate of which is now also above 0%. For example, the interest rate on a German 10-year government bond is currently 0.2%, the highest level in three years. In August last year, it was still -0.5%.

By buying government bonds, the central bank is trying to keep interest rates low and improve financing conditions for consumers and businesses. Since the launch of the first major asset purchase programme in 2014, more than €3 trillion worth of debt has been purchased. As the graph below shows, these are mainly government bonds, but also corporate bonds. During the coronavirus crisis, the ECB stepped up its purchases to ensure stability in the bond market and to keep interest rate differentials between euro area countries under control. Now the central bank is under a lot of pressure to end the bond-buying program, but will that actually happen?

Total bond purchases by the ECB (Source: ECB)