OPINION
Market Rating Before FOMC MeetingJan 31
ECB Minutes: Council Intends to Move Deposit Rate to Positive Zone
In the minutes of the meeting, which held the refinancing operations rate constant at 0.0 percent, the deposit rate at minus 0.50 percent, and the marginal refinancing rate at 0.25 percent, members reportedly agreed that the process of normalizing monetary policy should be gradual.
However, the need to maintain policy consistency and predictability ECB was recognized in the minutes, which noted that depending on the risks and conditions of the inflation outlook, stronger and earlier responses might be needed to maintain price stability over the medium term.
It was stated in the text that global trade experienced a significant loss of momentum as a result of developments in China in the first quarter of 2022 and that the war in Ukraine made it difficult to gradually ease the global supply pressures that started at the end of 2021.
According to the minutes, businesses are dealing with higher costs and fresh interruptions in their supply chains, but income and consumption will continue to be supported by the reopening of the pandemic's most afflicted industries and a stable labor market.
While the minutes shared those members agreed the fiscal policies helped mitigate the impact of the war, they broadly agreed that wage developments play a central role in the current inflation outlook.
However, it was underlined in the minutes that most of the members supported the 25 basis point rate hike proposal at the July meeting, while a larger tightening was not excluded. This monetary tightening, which will be the first in 11 years, should be carefully prepared and explained. It was also emphasized that it should not cause undue volatility in the markets.
In the text, where several members expressed their preference for a larger rate hike at the July meeting, it was noted that a large first-rate hike would carry the risk of excessive market reaction.
While it was noted in the minutes that the medium-term inflation outlook revealed the need for more steps to be taken in the normalization of monetary policy, growth and employment were surprisingly robust despite the shocks. In this context, stagflation is not a possible outcome.
In the text, it was stated that the Governing Council intends to move the deposit interest rate to the positive zone. At the same time, it was announced that the data received in the period until September would significantly affect the medium-term inflation outlook in both directions. Finally, the text reiterated that members are ready to adjust all their tools within the mandate to ensure inflation stabilizes at the medium-term 2 percent target.
