Highlights
Minutes of the ECB's December meeting confirm that the bank was keen to emphasise that interest rates were the key tool of monetary policy at a time when QT was about to begin. QT should be seen as a background programme.
Members expected the Eurozone economy to contract in both the then current quarter and the first quarter of 2023. The recession was thought most likely to be relatively short-lived and shallow but risks to the growth outlook were still thought to be the downside, especially in the near term. In the event of a complete cut-off of Russian gas, real GDP would contract by 0.6 percent in 2023 before recovering to grow by 0.2 percent in 2024 and 2.0 percent in 2025.
Inflation had fallen but remained well above target and risks were primarily on the upside. In particular, near-term pipeline pressures could lead to stronger than expected rises in retail prices for energy and food while over the medium-term risks stemmed primarily from domestic factors, such as a persistent increase in inflation expectations above the ECB's target or higher than anticipated wage rises. Moreover, core prices continued to display very strong month-on-month dynamics.
In sum, the view was widely shared that monetary policy had to be tightened decisively as the current configuration of interest rates and expectations embodied in market pricing was not sufficiently restrictive to bring inflation back to target in a timely manner. Consequently, it was maintained that interest rates had to rise above the levels that market participants were currently expecting and had to remain at sufficiently restrictive levels for longer to reduce inflation. Such an adjustment was deemed to be also in line with the Governing Council's communication of a data-dependent, meeting-by-meeting approach to its monetary policy decisions.
Members expected the Eurozone economy to contract in both the then current quarter and the first quarter of 2023. The recession was thought most likely to be relatively short-lived and shallow but risks to the growth outlook were still thought to be the downside, especially in the near term. In the event of a complete cut-off of Russian gas, real GDP would contract by 0.6 percent in 2023 before recovering to grow by 0.2 percent in 2024 and 2.0 percent in 2025.
Inflation had fallen but remained well above target and risks were primarily on the upside. In particular, near-term pipeline pressures could lead to stronger than expected rises in retail prices for energy and food while over the medium-term risks stemmed primarily from domestic factors, such as a persistent increase in inflation expectations above the ECB's target or higher than anticipated wage rises. Moreover, core prices continued to display very strong month-on-month dynamics.
In sum, the view was widely shared that monetary policy had to be tightened decisively as the current configuration of interest rates and expectations embodied in market pricing was not sufficiently restrictive to bring inflation back to target in a timely manner. Consequently, it was maintained that interest rates had to rise above the levels that market participants were currently expecting and had to remain at sufficiently restrictive levels for longer to reduce inflation. Such an adjustment was deemed to be also in line with the Governing Council's communication of a data-dependent, meeting-by-meeting approach to its monetary policy decisions.
Definition
The European Central Bank (ECB) meets about every six weeks to determine the appropriate stance of monetary policy. The precise details of the policy deliberations are kept secret for thirty years but, since the 22nd January 2015 meeting, summary version of the minutes have been made available around four weeks after the discussions have taken place.
Description
The minutes provide a key insight into what the ECB is focusing upon when setting policy. As such they potentially can have a sizeable impact upon investor sentiment; especially at times when speculation is rife about a possible near-term change in official interest rates and/or non-conventional monetary policy instruments.
