LONDON (Reuters – Thursday’s announcement by the European Central Bank that asset purchases would be halted in the third quarter of 2014 was made because inflation rose above concerns about Russia’s invasion.

Investors were shocked by this surprise. Many had expected the ECB not to raise rates until more details are available on the economic impact of the war in Iraq. However, President Christine Lagarde stated that rates will not increase until after the end of bond buying.

After the statement was made, the yields on bonds in the Eurozone and the euro shot up. However, the currency’s gains against USD later faded. .

Below are comments by analysts about the statement.

ANNA STUPNYTSKA GLOBAL MACRO ECONOMIST, FIDELITY INTERNATIONAL

“The ECB faces a serious dilemma in the coming months.

“We believe as the growth shock becomes clearer in the data over a few weeks, ECB’s focus will likely move away from high-inflation focus to try and limit economic and market distress.

“We don’t anticipate the ECB raising rates this year. We believe that the risk of QE is skewed in our favor, especially if the gas supply from Russia to Europe is disrupted moving forward.”

MARCHEL ALEXANDROVICH EUROPEAN ECONOMIST SALTMARSH ECONOMICS, LONDON

It’s not a surprise at all. The ECB may signal QE exit, as we saw in the past week.

Christine Lagarde (ECB President) will probably stress at the press conference that this is a one-step approach and that they will not be rigid. There is still a way to end quantitative easing, but it’s not a sign of a rate increase soon.

They are choosing to accept some uncertainty caused by war for the moment. We could see inflation rising above 6%. This would have a more immediate effect, increasing inflation.

They are now focusing their attention on the upside inflation risks, not the downside growth risks. However, that is not a fixed fact.

CHRIS SCICLUNA, HEAD OF RESEARCH, DAIWA CAPITAL MARKETS

They could end asset purchases in Q3, although it’s possible. However, this is not an agreed deal. It also depends on data. We could get to Q3 with the economy sliding into recession.

The statement clearly indicates that the ECB does not expect inflation to fall below target. However, they might not end net asset purchases for Q3 if things turn around.

“The statement was more bullish than markets had priced it in. This is why we’ve seen a large increase in BTP spreads.

“The ECB gave more room for maneuvering by suggesting that interest rates would not go up soon after asset sales end”

SEEMA SHAH CHIEF STRATEGIST, PRINCIPAL GLOBAL INVESTORS

Market participants were expecting an ECB surrender in light of lower growth forecasts, but they will be surprised to learn that the Asset Purchase Program is being reduced faster. Nonetheless, in an inflation rate that is still well above target, the ECB must maintain a commitment to price stability.

However, it is clear that if there are prolonged conflicts and high energy prices weighing heavily on households and their confidence, then the ECB may find it extremely difficult to increase rates for this year. This is why central bankers would be so unhappy.

TD SECURITIES

This is more aggressive than most people thought. It echoes the broad expectations prior to the war in Ukraine and indicates that, despite the potential severe impact on euro area growth over the next months, central banks still see the upside risk to inflation as the main concern.

BRAD BECHTEL, GLOBAL HEAD OF FX, JEFFERIES, NEW YORK:

“Central banks must focus on inflation and see rising pressures to be a problem. Norway’s prints are an example of this.

The system still has a lot of stimulus, so policymakers effectively start from the zero lower pounds when it is time to make policy. It is therefore a powerful signalling tool. Even if the military action ceases quickly, the ECB is likely to be facing an inflationary spike for a few weeks and this is the correct stance.