LONDON: Euro zone stocks fell on Thursday after the European Central Bank surprised markets by accelerating its exit from pandemic-related stimulus.

An index of euro zone stocks closed down 2.5% having fallen up to 3%, while blue-chips slumped 3%.

But euro zone bond yields soared and banks cut some session losses, as the ECB planned to end asset purchases in the third quarter, earlier than expected, prioritising soaring inflation over the potential economic impact of Russia’s invasion of Ukraine.

“With a geopolitical shock of unknown length and intensity still ongoing, markets have clearly been surprised by the ECB’s decision to start reducing this safety net,” said Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors.

“In addition, markets have steepened the expected path of interest rate hikes.”

While the ECB announced modest growth downgrades for this year, it raised inflation forecasts more strongly: to 5.1% from an earlier forecast of 3.2%.

The German DAX and France’s CAC 40 fell almost 3% each, while Italy’s MIB lost 4.2%. The broader STOXX 600 index slipped 1.7%.

Auto stocks led losses in Europe, with BMW sliding 5.5% despite more than doubling pre-pandemic earnings in 2021.

The moves come a day after stellar gains for European bourses as Russia and Ukraine expressed willingness to talk.

But foreign ministers of the two countries have made clear that no progress had been made after the meeting as the war entered a third week.

A wave of sanctions against Russia, including a US ban on its oil imports, sent crude prices to 2008 highs this week, and equity markets tumbling as investors fretted over soaring inflation. Leaders of the European Union are ready to move ahead with more sanctions if necessary, a draft EU declaration showed.

European stocks hit record highs at the start of the year, with banks soaring as investors bet on a strong economy and tighter monetary policies globally. However, the Ukraine crisis upended the rally, driving the benchmark STOXX 600 down over 12% so far this year.

Europe’s banks revealed billions worth of Russia risk as harsh sanctions bite.

With commodity prices at elevated levels, the materials sector outperformed, despite a 4.7% slide in Rio Tinto after it became the first major mining company to cut ties with Russian businesses.

Among stocks, Carlsberg slipped 5.5% after Danish brewer suspended its forecast due to uncertainty about the large Russian market.

German fashion house Hugo Boss fell 7.1% after announcing a temporary halt to its business in Russia.