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European Central Bank meeting accounts show inflation fears justifying more rate hikes

Flags fly in front of the European Central Bank building, in Frankfurt, Germany, on July 21.WOLFGANG RATTAY/Reuters

European Central Bank policy-makers feared that inflation may be getting entrenched at their last policy gathering so rates would need to rise further, the accounts of the Oct. 26-27 meeting showed on Thursday.

The ECB raised rates by 75 basis points to 1.5 per cent at the meeting to fight sky high inflation, bringing its total hikes to 200 basis points since July for its fastest policy tightening on record.

Policy-makers also put the reduction of the bank’s €9-trillion balance sheet on the agenda – inching closer to unwinding a decade worth of government debt purchases aimed at rekindling inflation that had been undershooting the ECB’s objective.

“It was also clear that rates would need to be raised further to reach a level that would deliver on the ECB’s 2 per cent medium-term target,” the accounts of the meeting showed.

The ECB added that some policy-makers even expressed the view that “monetary tightening would probably need to continue after the monetary policy stance had been normalized and moved into broadly neutral territory”.

The 75-basis-point rate hike was supported by a large majority, although a “few” policy maker wanted a smaller, 50-basis-point move.

While the ECB firmly committed to further rate hikes, markets are now expecting a more modest, 50 basis point move on December 15 as a string of policy-makers suggested that a slowdown after back-to-back 75 basis point increases was appropriate.

A possible compromise may be that a smaller rate hike is coupled with an early start in the reduction in the portfolio of bonds bought under the ECB’s €3.3-trillion Asset Purchase Programme, in a process known as quantitative tightening.

Even if the ECB slows down, markets see the deposit rate doubling to 3 per cent next year as inflation, now at 10.6 per cent, will take years, possibly until 2025, to fall back to the ECB’s 2 per cent target.

https://www.tausiinsider.com/european-central-bank-meeting-accounts-show-inflation-fears-justifying-more-rate-hikes/?feed_id=332894&_unique_id=64665a2bf1c8a

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