• The ECB said Thursday it will move faster on scaling back the size of its monthly bond buying.
  • The central bank plans to end its asset buying in the 3rd quarter, but will revise that depending on inflation.
  • It said the Russia-Ukraine conflict is a 'watershed' for Europe, as it held interest rates steady.

The European Central Bank said Thursday it will move faster on scaling back its monthly asset purchases, as it takes into account the uncertainty caused by Russia's invasion of Ukraine.

In a surprise move, the ECB revised its taper schedule and said it may end its bond buying in the third quarter. However, it said it will keep assessing inflation data and will adjust its plans if required.

"A faster winding-down of the asset purchase program will perhaps come as a surprise to market participants who expected an ECB capitulation in the face of weaker growth forecasts," Seema Shah, chief strategist at Principal Global Investors, said.

"Yet, with inflation still drastically above their target, it is important that the ECB retains an air of unwavering commitment to price stability," she added.

The ECB's shift was likely influenced by the increased risk of stagflation in the economic fallout from the Russia-Ukraine conflict, some analysts said.

"The Russian invasion of Ukraine is a watershed for Europe," the ECB said in a statement, promising to implement the sanctions decided by the EU and regional government.

Sanctions imposed by the West on Russia have added to fears of disruption to supply from the country, a major producer of oil, gas, nickel and other commodities

Commodity prices have soared since Russia attacked Ukraine two weeks ago, with the likelihood the rises will feed through into higher prices for consumers. That has brought warnings from analysts about the risk of stagflation — where stagnant economic growth is combined with rampant inflation.

The ECB now plans to buy 40 billion euros' worth of assets in April, and then reduce the total by 10 billion euros in both May and June. It had laid out purchases of 40 billion euros a month during the second quarter, then 30 billion euros in the third quarter, and 20 billion euros in the fourth.

Its new plan could be revised again, depending on the pace of inflation. It rose to 5.8% in February, from 5.1% the previous month, according to data from Eurostat.

"If the medium-term inflation outlook changes, and if financing conditions become inconsistent with further progress towards our two per cent target, we stand ready to revise our schedule for net asset purchases in terms of size and/or duration," the central bank said in a statement after its policy meeting.

The euro was trading at around $1.100 after the decision, down 0.6% on the day, having fallen back from a session high of $1.1121.

At the ECB meeting, its policymakers kept key interest rates unchanged, saying they would stay at current levels until it sees inflation reaching its 2% target well ahead of its projection horizon.

"It looks like rates are going nowhere, up or down, any time soon," Neil Birrell, CIO and fund manager at Premier Miton Investors, said.

"The only real certainty is that inflation is on the way up and growth is under threat — it must even be worried about financial stability, so caution and flexibility are the watchwords."

Read more: 'It's like a game of musical chairs': A hedge-fund strategist explains how to navigate the oil market as the price flirts with a $140 a barrel — and identifies a price point to monitor to avoid being left 'standing when the chair gets pulled'

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