ECB Officials Saw More Easing as Appropriate If Baseline Holds

(Bloomberg) — European Central Bank officials judged that interest rates could be cut further if consumer prices develop in line with expectations, an account of their last policy decision showed.

Most Read from Bloomberg

A “cautious approach was still warranted in view of the prevailing uncertainties and the existence of a number of factors that could hamper a rapid decline in inflation to target,” according to the summary, published Thursday. “Nevertheless, if the baseline projection for inflation was confirmed over the next few months and quarters, a gradual dialing-back of policy restrictiveness was seen as appropriate.”

The ECB is two weeks away from what’s widely expected to be the fifth rate cut of this easing cycle. Despite inflation ticking higher last month, policymakers are confident of meeting their 2% goal in 2025 and remain concerned about Europe’s sluggish economy.

Other key comments from the ECB’s account of its December gathering:

On Interest Rates

“A measured pace of interest-rate cuts was consistent with the general notion that more ‘check points’ had to be passed to ascertain whether disinflation remained on track and kept open the optionality to make adjustments along the way”
“Some members noted that a case could be made for a 50 basis-point rate cut at the current meeting and would have favored more consideration being given to the possibility of such a larger cut”
“It was argued that a gradual approach was needed to allow an assessment of whether policy rates had reached a broadly neutral level, taking proper account of transmission lags”
- “More generally, it was advisable to draw on a broad range of approaches to estimate or model the natural rate and assess the restrictiveness of policy, and to also look at the interplay of output, inflation and interest rates”

On Inflation

It was clear that “the Governing Council should not let its guard down in the final stretch of disinflation, particularly as some assumptions underlying the projections still needed to be corroborated by hard data and were conditional on monetary policy making its contribution and working its way through the economy”
“The last step toward achieving the inflation target would be a moderation in services inflation, which was projected to decrease noticeably in the first half of 2025”
“It was remarked that the inflationary effects of the pre-announced US policies were likely to be bigger in the United States than in the rest of the world”
- “However, it was seen as important to better understand the likely response of China to higher tariffs that would probably be imposed on Chinese products and the extent to which this might cause a diversion of Chinese exports from the United States to the euro area”
“The projection for 2027 took account of the estimated impact of the expanded EU ETS. If this were not included, inflation would drop below target in 2027, which was seen as surprising and driven mainly by very weak projected energy price inflation in 2027, far below historical averages”
“All in all, risks to inflation appeared to have become more two-sided. At the same time, it was argued that the risks to inflation in the medium term were more to the downside, especially given the higher probability of weaker growth”

Story continues

On the Economy

“Members underlined that geopolitical and economic policy uncertainty had become more pronounced since the last Governing Council meeting, owing to increased uncertainty about US policies on trade, migration and defense, as well as about the future of multilateral cooperation”
“Although it was fully acknowledged that the projections were reasonable in such uncertain times, trade policies in the United States, above all, could play out in an adverse direction”
“Questions were raised about the projected increase in labour productivity, which was explained in the projections by higher capacity utilization in response to higher demand. Some skepticism was expressed about the extent to which low labour productivity was linked to cyclical factors”