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Get ready – the quantitative tightening is on the way! Although the European Central Bank kept its monetary policy unchanged last week, it did confirm its intention to end bond purchases in the third quarter. The ECB said it plans to reduce its bond purchases under its Asset Purchase Program to €30 billion in May and €20 billion in June from the current pace of €40 billion, with purchases ending sometime in the third quarter.
After that, the ECB is expected to start raising interest rates in the same way as the Bank of England and the U.S. Federal Reserve. The interest rate on the ECB’s main refinancing operations and the interest rates on the marginal lending facility and the deposit facility remain unchanged at 0.00%, 0.25%, and -0.50%, respectively. The market clearly expected something worse as just right after the meeting the Stoxx Europe 600 composite index rose 0.67% to 459.82 points at the close of trading. The German DAX added 0.62%, the British FTSE 100 gained 0.47%, the French CAC 40 0.72%, the Spanish IBEX 35 0.94% and the Italian FTSE MIB 0.57%.
On the commodities market side, Brent crude oil rose above 110 dollars per barrel on Thursday. Among the main reasons for the rise were fears that the European Union will impose a ban on oil imports from Russia as part of a new sanctions package. For the time being, however, major oil traders plan only to reduce purchases of crude oil and petroleum products from Russian state-owned energy companies from May onwards.
An outright refusal by the eurozone to import Russian energy would have serious consequences, ECB chief Christine Lagarde warned. The impact of a withdrawal of Russian energy resources would be uneven, with some countries more affected than others, Lagarde acknowledged. Inflation in the eurozone, which is already almost four times above target, could rise further due to the conflict in Ukraine, Lagarde said. Developments in the eurozone economies will depend critically on how the situation evolves, as well as the impact of sanctions already imposed and possible new measures, she said.
Another important issue could be the semiconductor deficit. Taiwanese electronics manufacturer Pegatron Corp, which primarily assembles Apple Inc. products, has suspended operations in Shanghai, as well as in neighboring Jiangsu province, due to covid restrictions. Overall, semiconductor shortages remain the main problem for many companies. For example, the CEO of German automaker BMW said that until 2023, the automotive industry will face shortages of vital products.
There is a possibility that the difficult geopolitical situation will aggravate the shortage of semiconductor chips. According to cybersecurity, intelligence, and emerging technologies researcher at the Heritage Foundation, “three of the world’s largest companies [that manufacture neon] are based in devastated Mariupol and two in Odesa. It will be three to six months before you see serious consequences…but if the conflict drags on, it will cause supply chain problems.”
