ECB debate reflects growing inflation fears, Sept accounts show

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FRANKFURT (Businesshala) – European Central Bank policymakers debated a major cut in asset purchases last month and brushed off more inflation concerns than in their post-meeting communications, in the accounts of the September 9 discussion on Thursday. shown.

FILE PHOTO: The horizon with the banking district and the European Central Bank (ECB) headquarters is taken in Frankfurt, Germany October 4, 2021. REUTERS/Kai Pfaffenbach

With the economy now on a solid footing and inflation well above the ECB’s target, policymakers prepare for a crucial debate on whether to discontinue support in December and whether the longer-term inflation outlook is still in place to meet other stimulus measures. warrant for. .

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In its first albeit token move to end pandemic-related incentives, the ECB last month decided to make a “slight” cut in bond purchases. But some policymakers made the case for bigger cuts, arguing that the central bank’s response was out of sync with the recovery.

“It was argued that a symmetric application of the (Pandemic Emergency Procurement Program) framework would demand a further reduction in the pace of procurement,” the ECB said. “From this perspective, buying momentum similar to the level prevailing at the beginning of the year would be appropriate.”

Some policy hawks went even further, arguing that as markets were already poised for an end to emergency buying without a significant impact on the financing situation, investors were well prepared.

“It was argued that markets were already expecting an end to net asset purchases under PEPP by March 2022,” the accounts showed. “The point was made that, even without the PEPP, the overall monetary policy stance remained overly accommodative.”

In the end, the ECB opted for a more cautious move, fearing that a major stimulus cut could be seen as a step towards an exit from its easing monetary policy, given weak inflation prospects in the medium term. Given a premature move.

inflation

While ECB chief Christine Lagarde eased inflation fears after the policy meeting, accounts showed greater concern about price pressures, even though policymakers still maintained their baseline view that price pressures would ease next year. .

Inflation hit a 13-year high of 3.4% last month and could still reach 4% this year, even as the ECB sees price growth slipping below its target over the next several years.

“The risks to the inflation outlook … were widely considered to be upward sloping,” the accounts showed, with policymakers arguing that the ECB should keep an eye on a potential inflation “regime change”.

While wages were not indicating that higher inflation could rise, some warned that the length and magnitude of the spike as well as supply constraints and excess savings could lead to higher second-round inflation.

Policymakers also considered whether their projection models were working well given the high inflation this year.

“This raised doubts about how well the models relying on projections were able to capture the structural changes implied by the pandemic and the impact of the ECB’s new monetary policy strategy at present in the economy,” the ECB said.

Reporting by Balazs Koranyi; Editing by Francesco Canepa and Hugh Lawson

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