European
Central Bank released an account of its December 11-12 monetary policy meeting, at which its policymakers decided to
reduce three key interest rates by 25 basis points. It said
that:
- Since
ECB’s October 2024 meeting, narrative in financial markets had shifted as a
result of rising trade and economic policy uncertainty;
- Rising
uncertainty and diverging macroeconomic data had been reflected in a sharp
divergence in monetary policy expectations;
- Main
driver of the EUR/USD exchange rate had been the sharp divergence in interest
rates. Market perceptions of diverging growth trajectories had also been
reflected in equity markets;
- Recent
developments had accelerated the easing of euro area financial conditions,
while inflation expectations had firmed up around the ECB’s inflation target of
2%;
- Incoming
information and the latest staff projections indicated that the disinflation process in the euro area remained
well on track;
- While
domestic inflation was still high, it was likely to come down as services
inflation dynamics moderated and labour cost pressures eased;
- Recent
cuts in the key ECB interest rates were also gradually being transmitted to
funding costs, but financing conditions remained restrictive along the entire
transmission chain;
- Staff
now expected a slower economic recovery than in the September projections,
marking another downward adjustment in the growth outlook relative to recent
projection rounds;
- A
25-basis-point rate cut in December was in line with a controlled pace of
easing and provided a sense of the direction of the path of interest rates;
- In
the current environment of high uncertainty, it was prudent to maintain agility
by following a meeting-by-meeting approach and not pre-commit to any particular
rate path;
- In
the event of upside shocks to the inflation outlook and/or to economic
momentum, monetary easing would be able to proceed more slowly than the path
embedded in the December projections;
- In
the event of downside shocks to the inflation outlook and/or to economic
momentum, it would be able to proceed more quickly;
- Members were increasingly confident that inflation would
return to target in the first half of 2025;
- There
were still many upside and downside risks to the inflation outlook;
- It was reiterated that data dependency precluded any
foregone conclusions regarding the future rate path;
- 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;
- If the baseline projection for inflation was confirmed
over the next few months and quarters, a gradual dialling-back of policy
restrictiveness was seen as appropriate;
- Some
members noted that a case could be made for a 50 basis point rate cut at the December
meeting. These members emphasised the deterioration in the euro area economic
outlook over successive projection exercises and stressed that the risks to
growth were tilted to the downside;
- Members
widely concurred that a 25 basis point cut was appropriate in light of the
gradual but not complete progress made towards returning inflation to 2% on a
sustained basis and in view of the prevailing risks and uncertainties;
- Members
pointed out that a significant part of the economic slowdown was likely
attributable to structural factors that monetary policy could not address and
which needed to be addressed by governments;
- Members also argued in favour of maintaining a data-dependent
and meeting-by-meeting approach to determining the appropriate level of policy
rates;
- Members
supported the proposed change in the wording of the monetary policy statement
that removed the tightening bias by replacing the intention to “remain
sufficiently restrictive” with a more two-sided pledge to adopt the appropriate
stance “to ensure that inflation stabilises sustainably at our 2% medium-term
target”. This change in the communication was seen as reinforcing the rate cut