The European Central Bank must keep its policy options open beyond a crucial meeting in December as uncertainty over the likely evolution of inflation is exceptionally high, policy-makers concluded in October, according to the accounts of the meeting.
High inflation is still largely seen as temporary but the current “hump” in prices will be more durable than once thought, raising the risk that wages will start to adjust and keep price growth elevated, the accounts showed.
“It was cautioned that the data available in December would not resolve all the uncertainties around the medium-term inflation outlook,” the accounts showed on Thursday.
“It was seen as important that the Governing Council should keep sufficient optionality to allow for future monetary policy actions, including beyond its December meeting,” the ECB said in the accounts.
The comments appear to echo calls by conservative policy-makers such as Jens Weidmann and Klaas Knot that the ECB avoid an extensive commitment beyond December as the inflation outlook could change quickly.
In December, the bank is all but certain to agree on winding down a 1.85 trillion euro ($2.08-trillion) pandemic emergency bond-buying program from March but will contemplate ramping up other purchases to pick up the slack.
While most policy-makers appear to agree on the need for continued stimulus, views differ on how much support may be needed as the inflation path was moving up, risks were elevated and projections would have to be raised.
“The view was expressed that the longer the inflation spike lasted, the more it would become entrenched in longer-term inflation expectations,” the accounts showed.
Still, the majority appeared to be of the view that even if risks were skewed towards higher inflation, the ECB needed to be patient and not tighten prematurely, especially since wages were not showing significant acceleration.
Policy doves, who will likely push for copious bond buying in Dec., argue that inflation will come down on its own as one-off factors are the main culprit, while wage inflation, a necessary condition for durable inflation, remains anaemic.
Conservatives meanwhile argue that even if temporary, high price growth will eventually push up wages, raising the risk that inflation will settle above the ECB’s target, a mark it has undershot for the past decade.
Still, both sides agree that a rate hike next year would be premature and the differences are about the pace of continued stimulus in the form of debt purchases.
“Market participants were possibly questioning the credibility of the Governing Council’s forward guidance,” the ECB said. “In this context, it was stressed that the Governing Council had to reaffirm … its determination to act forcefully and persistently.”
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