ECB Prepares to Raise Interest Rates in 2022

The European Central Bank said it ended its large-scale bond purchase program earlier than expected, paving the way for rate hikes later this year, disrupting financial markets and underscoring the challenge that Europe faces in managing the potential stagflation shock due to Russia's invasion of Ukraine.

ECB President Christine Lagarde warned that the war in Ukraine could significantly slow economic growth in the region, damaging trade and sentiment, while at the same time significantly boosting inflation in the short term. "We recognize that there is a lot of uncertainty," Lagarde said.

So far, the ECB is focused on high inflation rather than slowing economic growth. According to its statement, the bond purchase program will phase out in  September or earlier, overturning previous guidance that purchases will continue until October and beyond. This move will put an end to the major ECB simulation tools that have been implemented in much of the last seven years.

Even before the Ukrainian conflict, Europe's economic recovery was weaker than the United States of America. This is partly due to lower government spending. European Union leaders meeting near Paris on Thursday and Friday can take steps to remedy this by announcing a new government spending plan.