ECB minutes show concern about inflation and normalization of monetary policy

European Central Bank (ECB) authorities expressed widespread concern about the spread of inflation and defended the continuation of the normalization of monetary policy, the minutes of the bank’s April 14 meeting showed this Thursday (19).

With inflation rising to a record 7.4%, the ECB confirmed plans at the meeting to end a bond-buying scheme in the third quarter, but avoided any further commitments, including on interest rates, which remain negative. .

“Members widely expressed their concern about the high inflation figures,” the ECB said in the minutes of the meeting, “and widely shared the view that the gradual normalization of the monetary policy stance should be continued.”

“Some members considered it important to act without undue delay,” added the ECB.

“The risk was also seen that if the Governing Council does not signal a faster process of normalizing monetary policy, inflation expectations will continue to rise.”

Sentiment among officials has changed substantially in the five weeks since the meeting, making the minutes largely outdated.

Nearly everyone who has spoken publicly is now backing an interest rate hike in July, the first hike by the ECB in more than a decade, and many are pushing to raise their deposit rate into positive territory this year.

It is currently at -0.5%.

The concern is that inflation is not only high but is becoming widespread, raising the risk that rapid price growth will become entrenched well above the ECB’s 2% inflation target.

Indeed, core inflation, which eliminates the volatility of food and fuel prices, is at almost double 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 step, the ECB will decide, at its June 9 meeting, to end bond purchases by mid-year and will likely hint that it will follow through with an interest rate hike at its July meeting.

Some officials would prefer to raise rates in June, but the bank has promised that bond purchases will not end until the third quarter and that rates will only rise after that.

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

Markets are currently pricing in 1.07 percentage points of interest rate hikes for the rest of the year, or just over a 0.25 point at each meeting starting in July.