ECB Policymakers Want To Roll Back Stimulus Amid High Inflation: Bills By Reuters

© . FILE PHOTO: A symphony of light illuminates the south facade of the European Central Bank (ECB) headquarters in Frankfurt, Germany, Dec. 30, 2021. REUTERS/Wolfgang Rattay FRANKFURT () -European Central Bank policymakers seemed keen on the incentives their March 10 meeting, at which some called for even more action, as the conditions for raising rates had been met or were about to be met, the meeting’s records showed. Policymakers agreed at the meeting to end bond buying sometime in the third quarter, but made no further commitments to roll back stimulus measures, even as inflation continued to rise amid high energy and food prices. But a sizable group wanted to go further and set a firm end date for bond purchases as they had met their target and inflation now risked exceeding its target for an extended period, the accounts showed on Thursday. “A large number of members believed that the current high level of inflation and its persistence necessitated immediate further steps towards the normalization of monetary policy,” the meeting’s reports show. “It was argued that, for all practical purposes, the three forward guidance conditions for an upward adjustment in key ECB interest rates were met or nearly met,” the ECB added. But caution was advised, as policymakers argued that the war in Ukraine created so much uncertainty that the ECB should keep its options open and not commit to policy for too long. Policymakers nevertheless argued that ECB staff are likely to underestimate ongoing inflation, and that wars tend to generate inflation even if growth is likely to take a hit. They also argued that growth is likely to remain positive, so stagflation, a period of high inflation combined with sluggish growth, is unlikely. All these factors increased the risk that inflation expectations would exceed the ECB’s 2% target, a worrying phenomenon for central banks. “In such circumstances, the Governing Council could no longer afford to see through higher inflation, even if it was caused by an adverse supply shock,” the accounts show. The debate has likely continued since the meeting, as inflation continues to exceed expectations, hitting a record high of 7.5% last month, with some analysts now talking about the possibility of double-digit readings mid-year. But the war in Ukraine is likely to complicate discussions. High fuel prices and sanctions will weigh on growth, and the economies of the 19 eurozone countries are likely to stagnate at best in the first half of the year. Nevertheless, conservative policymakers, or “hawks”, will urge the ECB to set a more precise closing date for bond purchases, likely early in the third quarter, which will allow the bank to raise interest rates by the fall if such a step is then justified. Markets are now charging a combined price of 60 basis points in interest rate hikes from the bank minus 0.5% deposit rate this year, even as no policymaker has advocated such aggressive tightening. The next time the ECB meets on April 14, a more detailed timetable for the rollback of the stimulus measures is possible.

Leave a comment