European
Central Bank released an account of its March 6-7
monetary policy meeting, at which its policymakers decided to leave the three
key interest rates unchanged. It noted that:
- Three elements of the Governing Council’s reaction function - inflation
outlook, underlying inflation dynamics, and strength of monetary policy
transmission - supported an unchanged policy at the meeting;
- There had been further progress on all three elements, which warranted
increased confidence that inflation was on track to reach the ECB’s target in a
timely and sustainable manner;
- Fact that inflation had been slightly higher than anticipated in
February was not seen as changing this general picture;
- Inflation was expected to
continue its downward trend in the coming months;
- Inflation was expected to be back at target – or even slightly below
target – in the medium term, and earlier than had been previously anticipated;
- Members agreed that most measures
of underlying inflation had declined further since the last monetary policy
meeting;
- Projections for core inflation had also been revised down. It was now
expected to fall to 2% in 2026;
- Members generally agreed that monetary
policy transmission was working well, with less uncertainty about the
strength of transmission than when interest rates were still rising;
- Monetary policy was being transmitted robustly to financial markets,
financing conditions, credit conditions and aggregate demand. This had helped
to lower inflation but had also weighed on growth;
- Members expressed increased
confidence that inflation was on track to decline sustainably to the 2% target
in a timely manner;
- However, patience and caution
were still needed, and more evidence and data were required for the
Governing Council to be sufficiently confident that the task had been
accomplished;
- A smooth and sustainable return of inflation to target, as implied by
the projections, was also contingent on the monetary policy stance remaining
restrictive enough for long enough;
- It was widely felt that, while there were clearly risks to the
outlook, monetary policy was working and the disinflation process remained
solid and robust.
- The view was taken that the risks of overshooting versus undershooting
the ECB’s symmetric inflation target in the medium term were broadly balanced
or becoming more balanced;
- Members underlined the need for policy to remain data-dependent and to
continue to be based on the elements of the reaction function already
communicated. While it was wise to await
incoming data and evidence, the case for considering rate cuts was
strengthening;
- It was highlighted that the Governing Council would have significantly
more data and information by the June meeting, especially on wage dynamics. By
contrast, the new information available in time for the April meeting would be
much more limited;
- Questions remained about the sustainability of the disinflationary
process, particularly in services and domestic inflation, on account of the
uncertain outlook for wage growth, productivity growth and profit margins;
- To increase confidence
that inflation would sustainably return to the ECB’s target, incoming data needed
to confirm that important assumptions and predictions about these indicators in
the March ECB staff projections would indeed hold true