EZ ECB Monetary Policy Meeting Accounts

Ms Schnabel noted that, since the Governing Council’s previous monetary policy meeting on 16-17 October 2024, the narrative in financial markets had shifted as a result of rising trade and economic policy uncertainty. Investors had increasingly focused on the divergence in growth prospects between the euro area and the United States. This had manifested itself in a divergence of bond yield and equity price developments between the euro area and the United States, as well as a pronounced weakening of the euro against the US dollar. While the euro area near-term inflation outlook embedded in market pricing had shifted upwards, inflation compensation had declined over longer horizons. This had led investors to expect a frontloading of ECB rate cuts and a lower terminal rate. Owing to these expectations regarding the rate-cutting cycle, combined with the weakening of the euro exchange rate against the US dollar and still benign risk asset price constellations, financial conditions had loosened further. post: ECB ACCOUNTS: REGARDING THE INFLATION OUTLOOK, MEMBERS WERE INCREASINGLY CONFIDENT THAT INFLATION WOULD RETURN TO TARGET IN THE FIRST HALF OF 2025. post: ECB ACCOUNTS: 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. post: ECB ACCOUNTS: 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. post: ECB ACCOUNTS: SOME MEMBERS NOTED THAT A CASE COULD BE MADE FOR A 50 BPS RATE CUT AT THE CURRENT MEETING AND WOULD HAVE FAVOURED MORE CONSIDERATION BEING GIVEN TO THE POSSIBILITY OF SUCH A LARGER CUT.

Ms Schnabel noted that since the Governing Council’s previous monetary policy meeting on 11-12 September 2024, policy rate expectations had shifted back and forth. Incoming data had made it challenging for market participants to price in the speed and extent of both disinflation and the monetary policy easing cycle. The key drivers of financial market developments since the September meeting had been a sluggish euro area economy, a robust US economy and rising and volatile commodity prices. The combination of weaker euro area macroeconomic data and higher commodity prices had affected the market’s view of the inflation outlook and the perceived balance of risks to inflation. Inflation fixings (swap contracts linked to monthly releases of the Harmonised Index of Consumer Prices excluding tobacco) had recently shifted upwards significantly, reversing part of the decline seen following the Governing Council’s July meeting, when energy prices had dropped notably. These swings in investors’ view of the inflation outlook illustrated the significant impact of energy prices on inflation expectations. At the same time, market-based indicators of risks to inflation based on option pricing remained tilted to the downside over the near and medium term, although they had become more balanced recently, while risks to the longer-term inflation outlook had become tilted to the upside again. post: ECB ACCOUNTS: UPSIDE RISKS TO INFLATION WERE NOW ALSO SEEN AS LOWER, ECB ACCOUNTS: INFLATION WOULD PROBABLY NOW REACH THE 2% TARGET SOMEWHAT EARLIER. post: ECB Accounts: Disinflationary Process Was Well On Track. Inflation Had Turned Out Lower Than Expected In September And Was Close To Target post: ECB ACCOUNTS: A FEW MEMBERS INITIALLY EXPRESSED A VIEW THAT THEY WOULD HAVE PREFERRED TO ACCRUE MORE INFORMATION AND TO WAIT UNTIL DECEMBER. post: ECB Accounts: Acting Now Could Provide Insurance Against Downside Risks That Could Lead To An Undershooting Of The Target Further Ahead And Would Support A Soft Landing.

Ms Schnabel noted that since the Governing Council’s previous monetary policy meeting on 17-18 July 2024 there had been repeated periods of elevated market volatility, as growth concerns had become the dominant market theme. The volatility in risk asset markets had left a more persistent imprint on broader financial markets associated with shifting expectations for the policy path of the Federal Reserve System. The reappraisal of expectations for US monetary policy had spilled over into euro area rate expectations, supported by somewhat weaker economic data and a notable decline in headline inflation in the euro area. Overnight index swap (OIS) markets were currently pricing in a steeper and more frontloaded rate-cutting cycle than had been anticipated at the time of the Governing Council’s previous monetary policy meeting. At the same time, survey expectations had hardly changed relative to July. post: ECB ACCOUNTS: INFLATION WAS EXPECTED TO RISE AGAIN IN THE LATTER PART OF THIS YEAR || IT WAS THEN EXPECTED TO DECLINE TOWARDS THE TARGET OVER THE SECOND HALF OF NEXT YEAR ECB ACCOUNTS: RECENT NEGATIVE SURPRISES IN PMI MANUFACTURING OUTPUT INDICATED POTENTIAL HEADWINDS TO THE… post: ECB ACCOUNTS: THE RISK OF DELAYS IN REACHING THE ECB’S TARGET WAS SEEN TO WARRANT SOME CAUTION TO AVOID DIALLING BACK POLICY RESTRICTION PREMATURELY ECB ACCOUNTS: FOREIGN DEMAND WAS SHOWING SIGNS OF WEAKNESS, WITH FALLING EXPORT ORDERS AND PMIS ECB ACCOUNTS: CORE INFLATION AND…

Ms Schnabel noted that since the Governing Council’s previous monetary policy meeting on 5-6 June 2024, financial markets had moved in response to political news, which had caused some volatility, and in response to weaker than expected US inflation data. The announcement of snap elections in France had dented investors’ risk appetite and the rally in euro area risk asset markets. However, the resulting rise in volatility in some market segments had remained contained and short-lived, without signs of systemic stress or ...

Ms Schnabel noted that since the Governing Council’s previous monetary policy meeting on 10-11 April 2024, the narrative in financial markets had converged across major advanced economies. It had moved towards a more gradual easing cycle and high-for-longer interest rates, owing to a more protracted “last mile” of disinflation. The key drivers of financial market developments had been a stronger euro area economy, signs of a cooling US economy and strong investor risk appetite. Euro area macroeconomic data had continued to turn out ...

Ms Schnabel noted that since the Governing Council’s previous monetary policy meeting on 6-7 March 2024 financial markets had started to price in some divergence between the monetary policy paths expected in the euro area and in the United States. This was reflected in a widening interest rate differential. In the United States, a series of solid economic data releases had signalled the US economy’s resilience to the current levels of interest rates. This had led financial markets to expect the timing of a first interest rate cut to be later and the overall extent of monetary policy easing to be less than previously anticipated. post: ECB ACCOUNTS: THE WIDELY AGREED PRICE DATA IS IN LINE WITH THE MID-TERM PATH. post: ECB ACCOUNTS: UNDERLYING INFLATION PROGRESS WAS GENERALLY SEEN. post: ECB ACCOUNTS: IT WAS SEEN AS PLAUSIBLE THAT THE GOVERNING COUNCIL WOULD BE IN A POSITION TO START EASING MONETARY POLICY RESTRICTIONS AT THE JUNE MEETING.

Ms Schnabel noted that, since the Governing Council’s previous monetary policy meeting on 24-25 January 2024, monetary policy expectations had retracted further from the early and large interest rate cuts initially foreseen at the turn of the year. More favourable news on the global economy and less favourable news on inflation had both been key factors in shaping financial market developments. In the case of the first factor, macroeconomic data surprises had moved into positive territory in the euro area, the United States and China for the first time since May 2023. As a result, investors attached a discernibly lower probability to the scenario of a hard landing for the global economy. post: ECB ACCOUNTS: MEMBERS EXPRESSED INCREASED CONFIDENCE THAT INFLATION WAS ON TRACK TO DECLINE SUSTAINABLY TO THE 2% INFLATION TARGET IN A TIMELY MANNER. post: ECB ACCOUNTS: THE CASE FOR CONSIDERING RATE CUTS WAS STRENGTHENING. post: ECB ACCOUNTS: IT IS IMPORTANT NOT TO BE COMPLACENT, AS THE DISINFLATIONARY PROCESS REMAINS FRAGILE. post: ECB ACCOUNTS: PATIENCE AND CAUTION WERE STILL NEEDED.