Most rate-setters at the European Central Bank pushed for it to separate concern about turmoil in the banking sector from its efforts to tame inflation by raising interest rates when they met last month.
The outcome of last month’s ECB meeting, which came less than a week after the collapse of Silicon Valley Bank and only a couple of days before Credit Suisse was pushed into the arms of its rival UBS, underlined how concern about high inflation remained paramount among rate-setters.
Some ECB policymakers cited the “separation principle” to argue that monetary policy should be assessed independently of financial stability risks before they pressed ahead with a widely expected half-percentage point rate rise, according to the account of the March 16 meeting published on Thursday.
“Unless the situation deteriorated significantly, the financial market tensions were unlikely to fundamentally change the governing council’s assessment of the inflation outlook,” the ECB said. “In light of the risk of persistent inflation dynamics, the ECB’s monetary policy had to be persistent as well.”
Since then, several members of the ECB’s rate-setting governing council have said they expect it to keep raising rates at its next meeting on May 4, while adding that it could slow the pace to a quarter-percentage point rise depending on data due in the next two weeks.
There was also scepticism among several council members at March’s meeting that its forecasts for inflation to fall steadily over the next few years were too optimistic. Some said its forecast for price growth to drop from an average of 5.3 per cent this year to 2.1 per cent in 2025 “gave the impression of an ‘immaculate disinflation’”.
The doubters pointed to above-forecast inflation figures in February and said “the strengthening of wage growth was consistent with second-round effects having already started”. They cited several “risk factors” that could keep inflation high, including generous fiscal policy by eurozone member states, which bolster the case for more rate rises.
After last month’s meeting, ECB president Christine Lagarde said there was “no trade-off” between its objectives of maintaining financial stability and raising rates to bring down inflation. She also said rates were likely to move higher if the ECB’s baseline inflation forecast remained unaffected by the upheaval in the banking sector.
There were a handful of dissenters among the council’s 26 members, who called for a pause in rate rises to assess the impact of the banking sector’s problems.
They argued that “the risks from not raising rates, if the tensions turned out to be shortlived, were assessed to be much less severe than the risks associated with raising rates into a persistent crisis”. But they were outnumbered by those wanting to increase rates.
Andrew Kenningham, an economist at research group Capital Economics, said the ECB’s account of the March meeting “confirms that it was only the banking sector turbulence that deterred policymakers from signalling further rate hikes to come”. He added that as banking failures “have now subsided” it would keep lifting rates, forecasting a rise in its deposit rate from 3 per cent to a peak of 4 per cent over the coming months.
Isabel Schnabel, an ECB executive board member, said in a speech on Wednesday that the extra complexity created by recent banking tumult made it impossible for her to say what it would do at future meetings.
But Schnabel presented data showing “inflation momentum remains high for all components except energy” and that the recent banking failures had hit US financial markets harder than those in the eurozone, while fiscal policy had become more expansionary in the euro area than in the US — developments that are likely to favour further ECB rate rises.
Source: Economy - ft.com
