FRANKFURT (Reuters) – European Central Bank policymakers meeting last month appeared confident that inflation was heading back to target but saw plenty of risks that still warranted steady policy and high borrowing costs, the accounts of the December policy meeting showed on Thursday.
The ECB left interest rates unchanged at the meeting and made clear that no further hikes were coming. But it also said it was way too early to discuss policy easing, even as markets were increasingly betting on the start of a reversal in early spring.
“There was no room for complacency and that it was not the time for the Governing Council to lower its guard,” the ECB said in the accounts of the Dec 13-14 meeting. “A need was seen for continued vigilance and patience, and for the maintenance of a restrictive stance for some time.”
“It was still too early to be confident that the task had been accomplished,” the bank added after policymakers agreed unanimously to keep rates steady.
Policymakers also concluded that they needed to push back against market expectations for rapid policy easing, even if there was unusual uncertainty around both the inflation and economic growth outlook.
“It was widely regarded as important not to accommodate market expectations in the post-meeting communication,” the ECB said. “Some humility was advised with respect to judging market expectations given prevailing uncertainties.”
Investors now expect 135 basis points of rate cuts this year, a big change compared with the start of the week when 150 basis points were priced in. The big move came after a host of policymakers said markets were getting ahead of themselves.
Inflation rose to 2.9% last month, as the ECB had expected, and the bank forecast price growth in the 2.5% to 2.9% range all year, not coming down to its target of 2% until 2025, even as investors bet on a more benign rate path.
Policymakers also concluded that all three of their criteria — the inflation outlook, underlying inflation and the strength of policy transmission — were moving in the right direction, raising confidence that policy was working as intended.
With now just a week to go before the ECB’s next policy meeting, the debate has shifted somewhat as policymakers now clearly accept that the next move is a reduction in borrowing costs, but a wide gap between investor and policymaker expectations still remains.
Investors think the ECB’s inflation outlook is wrong and rate cuts will have to start soon while policymakers argue that key data, including on wage developments, will not be available for months, so June is the first reasonable time to reconsider policy.
(This story has been refiled to add a dropped word in paragraph 1)
(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Hugh Lawson)