ECB holdouts dissented on new policy guidance, minutes show

European Central Bank updates

Holdouts on the European Central Bank’s governing council disagree with its new guidance on the future path of policy because they fear it understates the risk of rising inflation, according to the minutes of its latest policy meeting.

The ECB published revised forward guidance last month to incorporate the findings of its strategy review, which altered its primary policy target to make it more tolerant of above-target inflation.

The new wording states that interest rates will not rise until the ECB forecasts that inflation will reach its 2 per cent target “well ahead” of its projection horizon and that policy rates will be raised only if the evidence is sufficient to expect that the pace of price growth will persist “durably”. It also states that not only headline inflation, but also underlying inflation, should be heading towards 2 per cent.

Although “a large majority” of council members backed the revised guidance, “a few members upheld their reservations, as the amended formulation did not sufficiently address their concerns”, revealed the minutes of the ECB’s monetary policy meeting on July 21 and 22, released on Thursday.

Some policymakers worried that the wording “implied likelihood and persistence of overshooting” and “promising to keep interest rates at their present or lower levels for a very long time period without an explicit escape clause”.

Requiring inflation not to fall below the target “would effectively amount to intentionally overshooting”, which would be inconsistent with the ECB’s new strategy, they warned.

The guidance will be tested at the ECB’s rate-setting meeting next month, when policymakers are widely expected to discuss when to start scaling back their pandemic-era emergency bond purchases.

Andrew Kenningham, chief Europe economist at Capital Economics, said the minutes of July’s meeting suggested that “the Bank is more likely to take until December to agree when and how to taper” its pandemic emergency purchase plan.

Carsten Brzeski, global head of macro at the bank ING, said the minutes showed that last month “the only thing on the ECB’s mind was the new forward guidance and not tapering”.

“While the [US Federal Reserve] is currently investigating when and how to start tapering, the ECB seems in no rush at all to alter its course,” he said.

This is largely because policymakers regard recent rises in inflation as “mostly transitory”, according to the minutes.

Although eurozone inflation is expected to rise above 2 per cent later this year, after many years of undershooting the ECB’s target, the central bank forecasts that it will ebb again next year. Policymakers at July’s meeting cited “significant slack in the economy, weak wage growth and the past appreciation of the euro” as reasons why “underlying price pressures would likely remain subdued for some time”.

However, Frederik Ducrozet, strategist at Pictet Wealth Management, noted “some early signs of concerns over upside risks to the medium-term inflation outlook, for the first time since the great financial crisis”.

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