ECB accounts reveal divisions on inflation outlook

European Central Bank policymakers meeting last month saw a risk that inflation could get stuck above target and argued that the bank should be equally open to tightening or easing policy, the accounts of their Dec. 16 meeting showed on Thursday.

The ECB cut the amount of stimulus it is pumping into the euro zone economy at the meeting but extended its bond-buying until at least late 2022, arguing that inflation is likely to dip back below its 2% target by the end of the year.

The decision was not unanimous, however, and the accounts published on Thursday revealed deep divisions over the outlook, with a number of policymakers arguing that inflation was at risk of overshooting expectations.

“It was cautioned that a ‘higher for longer’ inflation scenario could not be ruled out,” the ECB said in the accounts.

“For 2023 and 2024, inflation in the baseline projection was already relatively close to 2% and, considering the upside risk to the projection, could easily turn out above 2%.”

Five of 25 Governing Council members opposed December’s policy moves, an unusually large group of dissenters for a body that normally strives for consensus and does not always take formal votes, sources told Reuters earlier.

“It was emphasised that the Governing Council should stress its willingness to adjust all of its instruments as appropriate, in either direction, in order to stabilise inflation at 2% over the medium term,” the ECB added.

The differences appeared to be around how durable the current bout of inflation might prove, the accounts showed.

The bank’s main view is that inflation — now running at a record high 5%, more than twice the ECB’s target — will abate on its own without policy action.

But a growing number of policymakers fear that even if the surge is temporary, it will last long enough to spur an acceleration in wage growth and lift consumer price inflation above the long-term trend, and possibly above the ECB’s target.

With December’s decision, the ECB will continue to buy bonds at least through the first nine months of the year but the purchases are set to decline in each quarter. The bank has also said an interest rate hike this year is highly unlikely.
Source: Reuters (Reporting by Balazs Koranyi and Francesco Canepa; Editing by Catherine Evans)