The European Central Bank (ECB) has hinted at its intention to continue raising interest rates, beyond the March meeting when it will undertake an increase of 50 basis points, up to 3.5%, according to the minutes of the meeting of the 2 of published this Thursday of February. The monetary authority considers that its messages warning about the evolution of inflation have been underestimated and that too much weight is being given to the general CPI.
“Attention was drawn to the gap between the trajectory of inflation implicit in the December projections and that implicit in the financial markets. Inflation that had dropped significantly in short horizons,” the document states.
In this regard, the ECB expresses its surprise at this behavior. “The question was raised as to whether markets were giving too much weight to falling energy prices. Against this background, it was somewhat surprisingly expected that markets would hardly react to the preliminary estimate that the January headline inflation issue of the euro area was lower than expected”, adds the community authority.
The debate within the central bank showed the governors’ concern about the effects of the second round, with an increase in the growth of wages and more rigid core inflation than expected. In addition, members of the ECB’s governing council are debating whether to pay more attention to cores, which exclude food and energy, giving signs of inflation taking root.
“The biggest concern for the ECB is that supply-driven inflation could morph into demand-driven inflation,” Carsten Brzeski, an ING economist, said in a note following the readings of the minutes. “Overall, the ECB appears to be entering a new game where further rate hikes will not garner the same support within the governing council, as going deep into tight territory increases the risk of adverse effects on the economy,” it adds. the expert.
Caution before entering restrictive territory
On the euro zone rate horizon, ECB advisers showed “broad support” for Chief Economist Philip Lane’s proposal to raise key ECB interest rates by 50 basis points and “needing to raise them further.” , specifically stating that he intended to raise rates by another 50 basis points.”
The Governing Council headed by Christine Lagarde supported that rates enter “restrictive territory” as of March, and it was necessary to keep them at sufficiently restrictive levels” to achieve the goal of 2% inflation in the medium term in the euro area.
Fears at the ECB about excessive tightening also reappeared in the debate, although the institution qualifies 3% of the current rate as neutral. “Worries about ‘overtightening’ were generally thought to be premature. It was made strong that policy rates are currently barely within the range of neutral rate estimates and that the large portfolio of Eurosystem bonds an accommodative policy will continue to be necessary,” the meeting document states.
