European Central Bank policymakers committed to keep “a steady hand” on stimulus measures, according to the minutes of their meeting last month, when they promised to disregard any short-term jumps in inflation or nominal interest rates.
The account of last month’s meeting, at which the ECB decided to keep its main stimulus measures unchanged, reinforces the impression among analysts that the central bank hopes to avoid any significant policy changes for most of this year.
Inflation in the eurozone shot up at the fastest rate for more than a decade in January, while expectations of a major US fiscal stimulus have pushed longer-term bond yields up in the US and Europe in recent days.
But the ECB’s governing council said “a temporary boost to inflation should not be mistaken for a sustained increase, which was still likely to emerge only slowly”.
The central bankers also said: “Not every increase in nominal yields should be interpreted as an unwarranted tightening of financing conditions and trigger a corresponding policy response . . . What mattered from a monetary policy perspective was the evolution of real rates.”
Carsten Brzeski, global head of macro at ING, said: “The ECB is really determined to do nothing for the rest of this year, but if there is going to have to be any change then the minutes show that it will be more loosening rather than a tightening of policy.”
Having launched an expanded stimulus package in December, the ECB has said it will maintain “favourable financing conditions” mainly via a €1.85tn bond-buying programme that is due to last until March 2022.
“It was argued that monetary policy should keep a steady hand and that the measures that were put in place in December should be given time to take full effect,” the minutes said.
The comments indicate that, even if longer-term bond yields continue to rise in the eurozone, the ECB is unlikely to respond by providing more stimulus as long as inflation expectations keep increasing in expectation of economic recovery from the effects of the pandemic.
While the eurozone economy shrank in the fourth quarter of last year and was likely to continue contracting in the first quarter of this year, policymakers said they detected “reasons for cautious optimism about the prospect of a recovery in the course of 2021”.
“Positive news” included the rebound in trade and the Chinese economy, the latest US fiscal stimulus and the UK-EU trade deal.
Consumers are becoming slightly less gloomy about the economic outlook, according to the latest survey by the European Commission, which said on Thursday that its consumer confidence reading had edged up 0.7 points to minus 14.8 in February.
However, the eurozone recovery could be delayed by extended lockdowns and slower than expected vaccinations, ECB policymakers said according to the meeting minutes, while warning of the “risk of a cliff-edge effect from a premature removal of fiscal stimulus” in the bloc.
The central bankers added that real interest rates — adjusted for inflation — fell to record lows at the start of the year. “The view was held that the governing council should allow real interest rates to decline if financing conditions eased on account of an increase in inflation expectations,” the minutes said.
Michael Schubert, economist at Commerzbank, said the minutes “provided some not too pessimistic views among ECB council members on the economic outlook, credit standards and the development of nominal yields”.
But Andrew Kenningham, economist at Capital Economics, said the ECB was still “more likely to push bond yields down again than to allow them to increase in the coming months”.