ECB minutes show concerns over euro zone inflation projections

Some European Central Bank (ECB) policymakers have argued it is underestimating future inflation, warned about the risk of a “regime shift” in prices and pushed for a bigger cut in asset purchases than it ultimately decided at its meeting last month.

These concerns by some of the ECB’s more conservative governing council members about “upside risks” to its inflation forecast were revealed in the minutes of its September meeting, published by the central bank on Thursday.

The debate highlights how the recent rise in euro zone inflation to its highest level for more than a decade is creating tension between ECB rate-setters over how long the price surge is likely to last, and whether the central bank should adjust monetary policy as a result.

The ECB last month forecast that inflation would fall from an annualised rate of 2.2 per cent this year to 1.7 per cent next year and 1.5 per cent in 2023. The minutes said most ECB council members agreed with its forecast for a “hump-shaped” pattern of inflation.

But after the central bank consistently underestimated how soaring energy prices and supply bottlenecks would drive inflation above its 2 per cent target this year, some council members expressed doubts about the reliability of its forecasts.

“They considered that the degree of persistence of the inflation shock and, especially, the outlook for inflation in 2023 were more uncertain, with the risk that inflation in 2023 might turn out to be higher than projected,” the minutes said. “The view was also expressed that the baseline projection for inflation in 2023 was too low.”

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Council members argued inflation would exceed the ECB forecasts “if a different path materialised for oil prices” and if supply chain bottlenecks lasted longer than expected or wage pressures started to materialise.

The ECB’s recent commitment to take account of rising house prices would also “lead to a higher expected path for inflation”, they said. Euro zone house prices rose 6.8 per cent in the year to the second quarter, their biggest rise for 15 years, according to data published on Thursday.

The policymakers said the ECB should pay closer attention to “direct and granular evidence, such as data collected from businesses, unions and households” to identify structural shifts caused by the pandemic that could cause possible “regime shifts” in the euro zone’s inflation outlook.

Policies to tackle climate change and future increases in carbon prices were also “likely to lead to sustained upward price pressures for a number of years”, some council members said. Since the September meeting, European gas prices have shot up and the cost of carbon credits has risen to record levels above €60 a tonne.

Carsten Brzeski, head of macro research at ING, said the minutes “signal a changed stance on inflation compared with a few months ago; a shift from a very benign assessment to one of more alertness and awareness that inflationary pressures might be less shortlived than initially thought”.

In response to rising inflation and easier financial conditions, the ECB last month also announced a “moderate” slowdown in the pace of its €1.85 trillion emergency bond-buying programme launched in response to the pandemic.

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Some more hawkish policymakers argued in favour of “a more substantial reduction in the pace of purchases”, according to the minutes. But others resisted this, saying it “might drive euro area interest rates higher and thwart an incipient increase in inflation expectations”. – Copyright The Financial Times Limited 2021


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