European Central Bank policymakers were split last month over how to tackle soaring inflation with some wanting interest rates to rise this summer, setting up a more heated debate when they meet again next week.
A number of ECB rate-setters pushed for “a firm end date” on its net bond purchases to prepare the ground for raising interest rates in the third quarter, warning that otherwise the bank risked “falling behind the curve” on inflation, according to the minutes of the governing council’s March meeting.
But others argued for a “wait-and-see” stance because of uncertainty over the economic impact on the eurozone of Russia’s invasion of Ukraine. They feared the war could “result in a technical recession”, which is defined as two consecutive quarters of negative growth rates.
The ECB decided on a “balanced compromise” to scale back its bond purchases more quickly and to end them in the third quarter unless a sharp downturn occurs, while deferring the decision on potentially raising interest rates.
Analysts said the minutes showed ECB policymakers were shifting in a more “hawkish” direction in favor of more quickly removing its monetary stimulus. “The hawks have the upper hand,” said Frederik Ducrozet, a strategist at Pictet Wealth Management.
Since last month’s meeting, annual inflation has hit a new eurozone record of 7.5 per cent. The figure for March is likely to strengthen calls from the hawks for the central bank to bring an end to nearly eight years of bond purchases and negative interest rates.
Investors are pricing in 0.6 percentage points of rate rises by the ECB before the end of this year, which would take its main deposit rate back into positive territory for the first time since 2014, up from its current all-time low of minus 0.5 per cent.
Several ECB policymakers have said they expect the central bank to raise rates this year and some, such as Klaas Knot of the Netherlands and Pierre Wunsch of Belgium, have said it could do so twice this year.
Policymakers have been sparring ahead of their meeting next week. Joachim Nagel, president of Germany’s central bank, said soaring inflation “worries us all” and predicted “savers may soon be able to look forward to higher interest rates again”.
But ECB executive board member Fabio Panetta said most eurozone price pressures came from energy markets and other factors outside the central bank’s control, so it would “have to massively suppress domestic demand to bring down inflation”.
Tightening monetary policy too soon would “would mean considerably lowering real activity and employment, knocking down wages and income,” Panetta warned, reflecting the views of more dovish council members.
While some policymakers questioned the reliability of ECB forecasts showing that inflation would fall back below 2 per cent in 2024 as “puzzling”, others said that in the new environment resulting from the war, bold steps were even less justified and could further dent confidence , ”According to the minutes.
Christine Lagarde, President of the ECB, tweeted on Thursday that she had tested positive for Covid-19, adding she had “reasonably mild” symptoms and would work from home in Frankfurt until fully recovered. If Lagarde is still testing positive next week, she is expected to join the governing council meeting and press conference via video link.