The ECB announces the conclusion of its bond purchases in the third quarter due to rising inflation.

• The ECB announced on Thursday that it will end its net asset purchases in the third quarter.
• The central bank is confronted with a conundrum as inflation surges to a record 7.5% in March, coinciding with a deteriorating economic growth outlook caused by the conflict in Ukraine.
• Goldman Sachs Asset Management's macro strategist, Gurpreet Gill, stated that the next step in the ECB's policy normalization plan will involve a decision on the rate of asset purchases in the upcoming quarter.

The European Central Bank on Thursday announced that it would end its bond buying program in the third quarter, while keeping its monetary policy unchanged.

The council must decide whether to address the 7.5% inflation recorded in March or the weakening economic growth caused by the conflict in Ukraine.

The ECB announced on Thursday that it anticipates ending its net asset purchases under the APP (asset purchase program) in the third quarter, as previously stated if data supports this decision.

The bank announced on Thursday that the Governing Council has decided to end net asset purchases under the APP in the third quarter based on the incoming data since the last meeting.

After finishing the bond buying program, the ECB is predicted to increase interest rates, mirroring the trajectory of the Bank of England and the U.S. Federal Reserve.

The development of the eurozone economy will depend on the evolution of the conflict, the impact of current sanctions, and any possible further measures, according to ECB President Christine Lagarde.

The sharp rise in energy costs will cause inflation to increase significantly and remain high over the coming months, as noted by Lagarde.

The ECB's monetary policy will be determined by incoming economic data and its ongoing evaluation of the outlook, as stated by Lagarde.

The ECB's Governing Council will take any necessary action to fulfill its mandate of pursuing price stability and safeguarding financial stability.

Interest rates

The ECB's main refinancing operations, marginal lending facility, and deposit facility interest rates remain unchanged at 0.00%, 0.25%, and -0.50% respectively.

The ECB will make any adjustments to key interest rates after the conclusion of the Governing Council's net purchases under the APP, and these changes will be done gradually, the bank stated.

The ECB interest rates will be determined by the Governing Council's forward guidance and its commitment to stabilize inflation at 2% over the medium term.

The ECB's 1.85 trillion euro ($2 trillion) Pandemic Emergency Purchase Programme, or PEPP, ended in March. Nevertheless, purchases under the older APP were being used as a bridge to the end of the PEPP.

The ECB was predicted to maintain its policy and set the stage for future action at its June 9 meeting after the uncertain outlook for growth and inflation has been determined by economists.

The Governing Council had a heated debate during the meeting on March 10 about the speed of policy normalization.

The economic outlook has been significantly negatively impacted by the war in Ukraine, sanctions on Russia, supply chain disruptions, high energy prices, and concerns about commodity scarcity for many industrial processes.

The surge in inflation rates may not be solely due to energy prices, but could be more systemic.

A ‘tough policy trade-off’

Fidelity International's global macro economist, Anna Stupnytska, stated that the ECB faces a challenging policy trade-off that is more intricate than that of other developed market central banks.

The negative interest rates and growing balance sheet in Europe's current policy stance are too easy for the entrenched high level of inflation, which is becoming broader, as she stated after Thursday's decision.

While the Euro area is experiencing a significant growth shock, it is being driven by two factors: the war in Ukraine and China's activity being affected by its zero-COVID policy. High-frequency data indicates that Euro area activity has already taken a sharp hit in March-April, with consumer-related indicators showing worryingly weak results.

Though Fidelity International has a recession in Europe as its base case, the severity and duration of the recession will depend on how further sanctions against Russia unfold, according to Stupnytska.

The likelihood of a full energy embargo and a worst-case recession scenario increases as the growth shock becomes more apparent in the data. We believe that the ECB's focus will shift away from high inflation towards limiting economic and market distress as the consequences of the invasion of Ukraine continue to ripple through the system.

Despite market expectations, we anticipate that the ECB will not increase rates until the fourth quarter of this year or early 2023.

Goldman Sachs Asset Management's macro strategist, Gurpreet Gill, stated that the next step in the ECB's policy normalization plan will be a decision on the pace of asset purchases in the next quarter, which she predicted would be the main topic at the July meeting.

Gill stated that since market-implied pricing suggests a July rate increase and a total of three rate hikes this year, there is little room for hawkish language to further raise prices.

The ECB has announced that it will cease its bond purchases in the third quarter.

- CNBC’s Annette Weisbach contributed to this report.