FRANKFURT -Euro zone inflation could “easily” get stuck above target and so the European Central Bank should keep the door open to tightening policy, ECB policymakers argued at a crucial meeting last month, accounts published by the ECB on Thursday showed.
The euro zone central bank cut the amount of stimulus it is pumping into the economy at the Dec. 16 meeting but extended its bond-buying until at least late 2022, arguing that inflation is likely to dip back below its 2% target by the end of the year.
The decision was not unanimous, however, and the accounts reveal deep divisions over the outlook, with a number of the 25 policymakers arguing that inflation was at risk of overshooting expectations.
“It was cautioned that a ‘higher for longer’ inflation scenario could not be ruled out,” the ECB said in the accounts.
“For 2023 and 2024, inflation in the baseline projection was already relatively close to 2% and, considering the upside risk to the projection, could easily turn out above 2%.”
Those comments go well beyond ECB chief Christine Lagarde’s assessment at her December news conference, following the meeting, in which she said there was “possibly” an upside risk to inflation.
The ECB’s projections have consistently missed actual inflation developments over the past decade and policymakers in recent meetings have questioned the bank’s forecasting models.
Five of the 25 Governing Council members opposed December’s policy moves, an unusually large group of dissenters for a body that normally strives for consensus and does not always take formal votes, sources told Reuters earlier.
They expressed reservations about the recalibration of bond buying under the Asset Purchase Programme, the extension of reinvestments under a pandemic emergency scheme and the increased flexibility of bond buys beyond the pandemic, the accounts showed.
“It was emphasised that the Governing Council should stress its willingness to adjust all of its instruments as appropriate, in either direction, in order to stabilise inflation at 2% over the medium term,” the ECB added.
The differences appeared to be around how durable the current bout of inflation might prove.
The bank’s main view is that inflation — now running at a record high 5%, more than twice the ECB’s target — will abate on its own without policy action.
But a growing number of policymakers fear that even if the surge is temporary, it will last long enough to spur an acceleration in wage growth and lift consumer price inflation above the long-term trend, and possibly above the ECB’s target.
Beyond December, policymakers appeared set to “gradually” normalise policy, which has been exceptionally loose for a decade as the 19-country euro zone suffered first through a debt crisis then a bout of anaemic inflation.
“At the same time, the argument was made that the benefits of additional asset purchases were diminishing and their costs and side effects were increasing,” the ECB accounts added.
With December’s decision, the ECB will continue to buy bonds at least through the first nine months of the year but the purchases are set to decline in each quarter. The bank has also said an interest rate hike this year is highly unlikely.