ECB Begins 'Step-by-step' Stimulus Exit As Inflation Surges

The European Central Bank on Thursday said it would wind down pandemic-era bond buys as the eurozone comes under pressure from soaring inflation, even as concerns grow about the fast-spreading Omicron variant of the coronavirus.

The eurozone has "become better at coping with the pandemic waves", said ECB President Christine Lagarde, adding that progress in the economic recovery "permits a step-by-step reduction in the pace of our asset purchases over the coming quarters."

Lagarde admitted however that Omicron and the potential emergence of other variants created "extra uncertainty", and said the bank was ready to react to any "negative shocks".

The ECB's chosen course sets its apart from the US Federal Reserve, which is speeding up its stimulus exit and has flagged a number of rate hikes over the coming years to tame inflation.

In Frankfurt, the ECB confirmed the end of its 1.85-trillion-euro ($2.1 trillion) pandemic-era bond purchasing programme (PEPP) in March 2022, and said it would start slowing the pace of purchases in the first quarter.

The pandemic emergency bond-buying programme, currently hoovering up around 70 billion euros worth of assets every month, is the ECB's main crisis-fighting tool, aimed at keeping borrowing costs low to stoke economic growth.

To avoid an abrupt drop in its bond-buying in March, the ECB will ramp up its pre-crisis asset purchase programme (APP) to soften the transition.

This would be increased in the second quarter to 40 billion euros, and reduced to 30 billion in the third quarter, the ECB said.

Purchases under the APP would continue thereafter at a pace of 20 billion euros "for as long as necessary" to support the ECB's goals.

"With today's decision, the ECB has entered into a very cautious tapering process," said ING economist Carsten Brzeski.

The ECB underlined the "flexibility" of its monetary response, singling out Greece as a target for support, and Lagarde said that PEPP purchases could be resumed "if necessary" should the pandemic situation worsen.

The ECB also left its interest rates at historic lows, including a negative deposit rate that means lenders pay to park excess cash at the central bank.

The Bank of England earlier surprised markets with a rate hike to combat runaway inflation.

Across the Atlantic, where the rise in inflation has been even steeper, the US Federal Reserve announced Wednesday that it was doubling the pace of its withdrawal from asset purchases, bringing the end forward by several months.

Policymakers at the US central bank also indicated that they expected the Fed could raise its interest rates up to three times in 2022.

The possibility of the ECB following suit remains distant, with Lagarde reiterating that a rate hike was "very unlikely" in 2022 and in any case would only come after the end of the asset-purchasing schemes.

While the ECB has up to now described the inflation spike as "transitory", attributing it to one-off pandemic related factors, price rises in the 19-nation euro region has progressed at a rate that has exceeded observers' expectations.

In November, consumer prices rose 4.9 percent year on year in the eurozone, a record in the history of the single currency.

In the US, Fed officials have dropped talk of "transitory" inflation.

The Omicron variant has raised fears of more disruption, aggravating supply bottlenecks that have pushed prices up faster and hampered economic growth.

Recent pressure on prises, particularly energy costs, drove the inflation forecast "significantly higher" for 2022, Lagarde said, and well above the bank's two-percent goal.

The ECB said it expected prices to rise at a pace of 3.2 percent next year -- up from September's forecast of 1.7 percent, its largest ever upwards revision.

Inflation was set to come in at 2.6 percent in 2021, before stabilising at 1.8 percent in 2023 and 2024.

Former International Monetary Fund chief Lagarde said there was "possibly an upside risk" to inflation running higher still over the medium term.

For growth, the ECB lowered its expectations for 2022 to 4.2 percent from 4.6 percent, before slowing to 2.9 percent in 2023 and 1.6 percent in 2024.