Breaking: ECB leaves rates unchanged as expected, announces APP will end in Q3

The European Central Bank announced on Thursday that it had left interest rates unchanged, with the deposit rate still at -0.5%, as had been expected by market participants. The central bank also announced new adjustments to its quantitative easing plans. Following the end of the Pandemic Emergency Purchase Programme (PEPP) this month, the Asset Purchase Programme will amount to EUR 40B in April, EUR 30B in May and EUR 20B in June, before ending in Q3. The calibration of net purchases in Q3 will ultimately be data-dependent and reflect the evolving assessment of the economic outlook. Previously the scheduled had been for EUR 40B per month in purchases in Q2, EUR 30B in Q3 and EUR 20B in Q4 (which would continue indefinitely). The ECB noted that it stands ready to reverse changes made to the APP if the outlook changes. 

In its statement, the ECB said that the invasion of Ukraine by Russi was a "watershed" moment for Europe and the bank expresses its full support for the people of Ukraine. On interest rates, the ECB said that any adjustment to interest rates will take place sometime after the end of the ECB's net purchases and will be gradual. The ECB expects interest rates to remain at their present levels until it sees inflation reaching 2.0% well ahead of the end of its projected horizon and durably for the rest of the projected horizon and until it judges that realised progress in underlying inflation is sufficiently advanced so as to be consistent with inflation stabilising at 2.0% over the medium-term.  

Market Reaction

The ECB's decision to quicken the pace it which it winds down QE purchases, which seemingly could end before the end of Q3, has seemingly surprised some and triggered a hawkish market reaction. EUR/USD jumped about 70 pips in an immediate response to the decision from the 1.1030s to above 1.1100. German 2-year yields have spiked about 15bps to around -0.35% from previously closer to -0.50%. German 10-year yields are up about 10bps from around 0.20% to around 0.30%. According to Reuters, Eurozone money markets now price 40bps in ECB tightening by the year's end versus 35bps prior to the decision.