Minutes of the December meeting show Governing Council (GC) members acknowledging a surprisingly sharp fall in inflation but also noting that the new staff projections showed the headline rate only returning to target in the second half of 2025. Consequently, it was unanimously agreed to leave key interest rates at current levels.

For the real economy, the impact of monetary policy tightening was thought to be increasingly visible and broadly proceeding as intended: financing and credit conditions had tightened, lending had been slowing, and aggregate demand had been weakening. Even so, it was argued that the latest staff forecasts for near-term growth might be too optimistic, particularly with regard to household consumption which could suffer from the removal of fiscal support measures introduced to combat the effects of Covid.

Confidence was expressed that inflation had reached the end of the strongest phase of the disinflationary cycle. While core and food inflation were expected to continue their gradual decline, upward energy-related base effects and the expiry of the Covid-related fiscal measures were pushing up headline inflation. Price momentum in services remained strong and importantly, negotiated wage growth had increased to 4.7 percent in the third quarter. Forward-looking wage trackers continued to signal high pressures in a still very tight labour market.

Against this backdrop it was stressed that there was no room for complacency and that it was not the time for the GC to lower its guard. Caution was warranted, as inflation would probably pick up in the near-term and there were continued uncertainties in relation to wages and underlying inflation dynamics.

Away from interest rates, a very large majority of members thought it appropriate to advance the normalisation of the balance sheet by including the pandemic emergency purchase programme (PEPP) in QT. This was viewed as a proportionate response in view of the initial objectives of the PEPP, which was an instrument designed to counter the serious risks to the monetary policy transmission mechanism and the outlook for the Eurozone posed by Covid. As the pandemic was largely over so maintaining full reinvestments was no longer seen as appropriate.

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.

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.