ECB releases the accounts of its October monetary policy meeting

  • Normal for the latter stages of a recovery to be accompanied by lower growth
  • Most of the recent upward pressure on prices was coming from base effects
  • It was stressed that the current outlook clearly lacked the stagnation element
  • Growth momentum was declining, but within a still strong recovery
  • It was recalled that stagflation experiences in the 1970s occurred in a different environment, in which indexation allowed wages to react to energy prices
  • Members broadly agreed with the assessment by Mr Lane in his introduction i.e. inflation expected to decline in the course of 2022
  • Members widely agreed on the expected hump-shaped pattern in the shorter-term inflation outlook
  • Confidence was expressed that the effects of higher energy prices and of supply bottlenecks would be temporary, although the decline in inflation in 2022 would now take longer than previously expected
  • Broad agreement among members that the key question at the current juncture was what the latest developments implied for the medium-term inflation outlook
  • Members considered that an increase in inflation in the medium-term required higher wage growth and inflation expectations
  • The view was widely shared that negotiated wage growth had remained subdued and there were no signs as yet of second-round effects on wages
  • Concerns were voiced that expectations regarding the future path of short-term money market interest rates were difficult to reconcile with ECB’s forward guidance
  • It was stressed that ECB had to reaffirm all three conditions of its forward guidance and its determination to act forcefully and persistently
  • Members concurred that the current and near-term increase in inflation was driven largely by temporary factors that would fade in the medium-term

TLDR: The view on the inflation outlook remains that it will be transitory i.e. fade some time later in 2022. The ECB isn’t too comfortable with the market trying to question its credibility on rates, so expect more pushback i.e. message that there is no sustained rise in inflation and the conditions for tightening will not be met next year.

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