FRANKFURT (Reuters) -European Central Bank policymakers appeared keen to unwind stimulus at their March 10 meeting, with some pushing for even more action, as conditions for raising rates had either been met or were about to be met, the accounts of the gathering showed.
Policymakers agreed at the meeting to end bond buys some time in the third quarter but made no further commitment to roll back stimulus, even as inflation continued to soar on high energy and food prices.
But a sizable group wanted to go even further, setting a firm end-date for the bond purchases as they have fulfilled their purpose and inflation was now at risk of overshooting the target for a prolonged period, the accounts showed on Thursday.
“A large number of members held the view that the current high level of inflation and its persistence called for immediate further steps towards monetary policy normalisation,” the accounts of the meeting showed.
“It was argued that, for all practical purposes, the three forward guidance conditions for an upward adjustment of the key ECB interest rates had either already been met or were very close to being met,” the ECB added.
But caution prevailed, with policymakers arguing that the war in Ukraine created so much uncertainty that the ECB needed to keep its options open and not commit to policy too far down the road.
Policymakers nevertheless argued that ECB staff were likely to be underestimating the persistence of 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 stay positive, so that stagflation, a period of high inflation coupled with stagnating growth, is unlikely.
All these factors raised the risk that inflation expectations could move above the ECB’s 2% target, a worrisome phenomenon for central banks.
“In such circumstances, the Governing Council could no longer afford to look through higher inflation, even if it was driven by an adverse supply shock,” the accounts showed.
The debate is likely to have moved on since the meeting, however, as inflation continues to beat expectations, hitting a record high 7.5% last month, with some analysts now talking about the possibility of double-digit readings by mid-year.
But the war in Ukraine is likely to complicate discussions. High fuel prices and sanctions will weigh on growth, and the 19-country euro zone economy is likely to stagnate at best in the first half of the year.
Conservative policymakers, or “hawks”, are nonetheless likely to push the ECB to set a more precise end-date for bond purchases, probably early in the third quarter, putting the bank in a position to raise interest rates by autumn if such a move is warranted then.
Markets are now pricing in a combined 60 basis points worth of rate hikes in the bank’s minus 0.5% deposit rate this year, even if no policymaker has made the case for such aggressive tightening.
The ECB will next meet on April 14 and a more detailed timeline for rolling back stimulus is possible.
(Reporting by Balazs Koranyi; Editing by Catherine Evans)