Highlights
Minutes of the January meeting show that while Governing Council (GC) members expected inflation to continue to fall over coming months, they remained wary of elevated wage rises and declining productivity supporting domestic price pressures. The decision to keep key interest rates on hold was unanimous.
For the real economy, the impact of monetary policy tightening was particularly apparent in the housing market where investment continued to contract. Consumption was also sluggish and the expected pick-up at the end of 2023 now seemed unlikely to have occurred. Exports and imports remained subdued but the labour market was robust despite some tentative signs of a cooling in the demand for new workers. The risks to economic growth remained tilted to the downside.
Regarding inflation, recent information was thought to have broadly confirmed the GC's previous assessment of the medium-term outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. Inflation was heading towards the 2 percent target, possibly at a faster pace than previously expected. The current levels of the policy interest rates would make a substantial contribution to reaching that goal if maintained for a sufficiently long duration. However, the disinflationary process needed to be further along for the GC to be sufficiently confident that the target would be hit in a timely manner and inflation settle sustainably at that level. Developments in the Red Sea had had limited impact on energy prices which was considered surprising given the associated increase in shipping costs and lengthening in delivery times.
The risk of cutting policy rates too early was still seen as outweighing that of cutting rates too late and having to reverse course at the possible cost to credibility. The point was also made that the risk of an inadvertent overtightening was mitigated by the fact that financial markets were already pricing in a number of rate cuts in 2024, contributing to a loosening of both financial and financing conditions. However, it was also argued that such a loosening might be premature and could possibly derail or delay a timely return of inflation to target. In any case, members agreed that following a data-dependent rather than a calendar-based approach was important, in line with the elements of the reaction function that the Governing Council had communicated in 2023.
It was widely felt that the aggressive market pricing of future interest rates was not a sign that markets did not understand the ECB's reaction function. Instead, it appeared that markets simply expected inflation to be lower than foreseen in the December staff projections, notably for 2024.
For the real economy, the impact of monetary policy tightening was particularly apparent in the housing market where investment continued to contract. Consumption was also sluggish and the expected pick-up at the end of 2023 now seemed unlikely to have occurred. Exports and imports remained subdued but the labour market was robust despite some tentative signs of a cooling in the demand for new workers. The risks to economic growth remained tilted to the downside.
Regarding inflation, recent information was thought to have broadly confirmed the GC's previous assessment of the medium-term outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. Inflation was heading towards the 2 percent target, possibly at a faster pace than previously expected. The current levels of the policy interest rates would make a substantial contribution to reaching that goal if maintained for a sufficiently long duration. However, the disinflationary process needed to be further along for the GC to be sufficiently confident that the target would be hit in a timely manner and inflation settle sustainably at that level. Developments in the Red Sea had had limited impact on energy prices which was considered surprising given the associated increase in shipping costs and lengthening in delivery times.
The risk of cutting policy rates too early was still seen as outweighing that of cutting rates too late and having to reverse course at the possible cost to credibility. The point was also made that the risk of an inadvertent overtightening was mitigated by the fact that financial markets were already pricing in a number of rate cuts in 2024, contributing to a loosening of both financial and financing conditions. However, it was also argued that such a loosening might be premature and could possibly derail or delay a timely return of inflation to target. In any case, members agreed that following a data-dependent rather than a calendar-based approach was important, in line with the elements of the reaction function that the Governing Council had communicated in 2023.
It was widely felt that the aggressive market pricing of future interest rates was not a sign that markets did not understand the ECB's reaction function. Instead, it appeared that markets simply expected inflation to be lower than foreseen in the December staff projections, notably for 2024.
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.
