Frankfurt (Germany) (EFE).- The Governing Council of the European Central Bank (ECB) agreed in December to raise interest rates by half a percentage point with the commitment to emphasize that it is willing to raise them more significantly at a sustained pace.
This is clear from the minutes of the monetary policy meeting on December 15, which the ECB published this Thursday.
Preference for 75 basis points
The minutes show that “a large number of members initially expressed a preference for raising the ECB’s key interest rates by 75 basis points as inflation is clearly expected to be too high for too long.”
Market expectations and financial conditions are inconsistent with inflation returning to the ECB’s 2% target on time.
These members of the Governing Council considered that the worsening of the inflation outlook required an increase in interest rates greater than what the markets discounted.
But, the minutes add, “some of these members, however, expressed a desire to agree to an interest rate increase of 50 basis points if a majority supported” the proposal that Chief Economist Philip Lane then communicated. the willingness to raise them more significantly at a sustained rate.
“This was seen as somewhat equivalent to raising interest rates by 75 basis points” at the December meeting.
The minutes also show that the ECB is determined to tighten interest rates less aggressively at first but more sustainably because it expects inflation to persist and because there is a lot of uncertainty.
In this way, a large majority of members of the Governing Council supported Lane’s proposal to raise interest rates by 50 basis points and communicate that rates still have to rise significantly at a sustained pace.
Inflation falls but the ECB does not lower its guard
Inflation fell in the euro area in December to 9.2%.
But the president of the ECB, Christine Lagarde, has warned in Davos that inflation is still “too high”.
The Governing Council also considered in December that as interest rates rise and approach a neutral level, in which they do not boost or impede growth, the aggressiveness of the increases and the speed of the monetary adjustment become ” less relevant” and the continuity of the increases and the time in which the rates will remain in restrictive territory are more important.
Some ECB member also argued that raising rates by 50 basis points in December would allow monetary policy to be tightened for longer, which is important given that high inflation is going to persist longer.
Furthermore, with sustained increases of 50 basis points the ECB can better assess the impact.
The ECB is concerned about inflation and believes that even core inflation, which is less volatile, will remain persistently high.
An ECB member considered in December that if inflation significantly exceeded the 2% target “for at least four consecutive years, it became more difficult to argue that high inflation is mainly due to external shocks outside the reach of monetary policy.”
The wage increases will also create second-round effects, a situation in which rising inflation causes wage increases and these increases start a vicious cycle of inflation, according to the ECB.
In addition, the minutes add, expansive budgetary policies intensify inflationary pressures and interfere with the effect sought with interest rate rises.
However, the ECB considers that budgetary policy is responsible for softening the impact of inflation due to the sharp rise in energy prices.
The expected slowdown in economic growth is superficial and will not reduce inflationary pressures in any significant way, according to the ECB.
Rumors circulated this week that the ECB will raise the price of money by half a point in February, but that in March the increase would be less.
But several members of the Governing Council quickly denied them and have come out in favor of raising them by 50 basis points at various meetings.