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Policymakers at the European Central Bank (ECB) agreed last month that interest rate cuts should be approached cautiously and gradually, but they also indicated that more policy easing was likely on the horizon, all according to the publication of the bank’s Accounts of the December 11–12 gathering. Highlights Regarding the inflation outlook, members were increasingly confident that inflation would return to target in the first half of 2025. 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. The Governing Council should not let its guard down in the final stretch of disinflation. There were still many upside and downside risks to the inflation outlook. 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. This 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. Some members noted that a case could be made for a 50 basis point rate cut at the current meeting and would have favoured more consideration being given to the possibility of such a larger cut. Gradual approach was needed to allow an assessment of whether policy rates had reached a broadly neutral level. It was remarked that a 50 basis point cut could be perceived as the ECB having a more negative view of the state of the economy than was actually the case. It was advisable to draw on a broad range of approaches to estimate or model the natural rate. Case for adjusting interest rates by 50 basis points was not the same on the way down as it had been during…

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Filed under: News - @ January 16, 2025 1:21 pm