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ECB accounts show debate over speed of policy tightening

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© Reuters. FILE PHOTO: A symphony of light consisting of bars, lines and circles in blue and yellow, the colours of the European Union, illuminates the south facade of the European Central Bank (ECB) headquarters in Frankfurt, Germany, December 30, 2021. REUTERS/W

FRANKFURT (Reuters) – European Central Bank policymakers expressed widespread concern about the spread of inflation and made the case for continued policy normalisation, the accounts of their April 14 meeting showed on Thursday.

With inflation soaring to a record high 7.4%, the ECB confirmed plans at the meeting to end a bond purchase scheme in the third quarter but maintained an otherwise non-committal tone, avoiding any other pledges, including on interest rates, which remain deeply negative.

“Members widely expressed concern over the high inflation numbers,” the ECB said in the accounts of the meeting. “Members widely shared the view that the gradual normalisation of the monetary policy stance… should be continued.”

“Some members viewed it as important to act without undue delay,” the ECB added. “A risk was also seen that, if the Governing Council did not signal a faster policy normalisation process, inflation expectations would continue to rise.”

Sentiment among policymakers has shifted substantially in the five weeks since the meeting, making the accounts largely backward looking.

Nearly all who have spoken publicly are now backing an interest rate increase in July, the ECB’s first hike in over a decade, and many are pushing to lift its deposit rate into positive territory this year. It is currently at minus 0.5%.

Their concern is that inflation is not only high, it is becoming broad based, raising the risk that rapid price growth becomes entrenched well above the ECB’s 2% inflation target.

Indeed, underlying inflation, which filters out volatile food and fuel prices is almost twice the ECB’s target and the vast majority of private and public forecasts put overall price growth well above target even in 2023.

In the next move, the ECB will decide at its June 9 meeting to end bond purchases around mid-year and will likely provide unmistakable hints that a rate hike will follow at the July meeting.

Some policymakers would prefer to raise rates in June but the bank has promised that bond buys would not end before the third quarter and interest rates would only rise thereafter.

This schedule has essentially tied the ECB’s hands, making July 21 the first possible date for a rate hike without breaking the guidance.

Markets currently price 107 basis points of rate hikes for the rest of the year, or a little more than a quarter percent increase at each policy meeting from July onwards.

ECB accounts shows inflation worry; urgency of policy action

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