Financial News: ECB Minutes Show Policymakers Saw Room For More

ECB Minutes Show Policymakers Saw Room For More Easing

(RTTNews) - European Central Bank policymakers were looking forward to more interest rate cuts, but they saw the need for a cautious approach due to several uncertainties that could derail inflation from its path to the 2 percent target, the minutes of the December 11-12 policy session showed on Thursday.

In December, the Governing Council, led by ECB President Christine Lagarde, lowered the key interest rates by 25 basis points for a third time, thus taking <a href=https://www.rttnews.com/3496963/ecb-cuts-deposit-rate-to-3-00.aspx?refresh=1 target=_blank >the deposit rate to 3.00 percent</a>, and signaled more easing in January depending on the developments on the inflation front.

Rate-setters agreed that "a measured pace of interest rate cuts was consistent with the general notion that more "check points" had to be passed to ascertain whether disinflation remained on track and kept open the optionality to make adjustments along the way," the minutes that the ECB calls "account" showed.

"This cautious approach was still warranted in view of the prevailing uncertainties and the existence of a number of factors that could hamper a rapid decline in inflation to target," the minutes said.

ECB policymakers agreed that a gradual dialing-back of policy restrictiveness was seen as appropriate, if the baseline projection for inflation was confirmed over the next few months and quarters.

<a href=https://www.rttnews.com/3501137/acceleration-in-eurozone-inflation-signals-slower-ecb-rate-cuts.aspx target=_blank >Eurozone inflation accelerated</a> for the third straight month in December to 2.4 percent. However, core inflation held steady at 2.7 percent.

The easing bias among ECB policymakers was clear as the minutes showed that some saw the scope for a 50-basis points reduction in December given the deterioration in the euro area growth outlook.

However, this proposal was countered with the view that a 50-basis point cut could be perceived as the ECB having a more negative view of the state of the economy than was actually the case and that was not desirable unless warranted by additional negative shocks.

The ECB staff had lowered their growth projections in December and projected euro area growth at 1.1 percent next year, 1.4 percent in 2026 and 1.3 percent in 2027.

The next ECB policy announcement is scheduled for January 30 and the bank is widely expected to lower rates by a quarter-basis points again.

"At 3 percent, the deposit interest rate is still restrictive and too restrictive for the current weak state of the eurozone economy," ING economist Carsten Brzeski said.

"While the experience of being slow to address rising inflation will deter the ECB from adopting ultra-low rates, the desire to stay ahead of the curve remains a compelling reason to return interest rates to neutral as swiftly as possible," the economist added.

Cutting rates will become unavoidable for the ECB if the euro area economic situation weakens more than what was projected in December, Brzeski said. The ECB forecasts had used a terminal rate of below 2 percent, the economist pointed out.

A weaker economy is set to be the top concern for ECB policymakers this month. Data released on Wednesday showed that the German economy, the biggest in the euro bloc, remained stuck in a recession last year.

The preliminary estimates for the fourth quarter euro area GDP are set to be released just hours ahead of the ECB policy announcement on January 30.

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