OPINION
Market Rating Before FOMC MeetingJan 31
ECB Minutes: Inflation Will Remain Above the Target for a Long Time
The minutes of the European Central Bank's (ECB) monetary policy meeting on 7 - 8 September have been published today.
As it will be remembered, at the meeting, the bank increased the interest rate by 75 basis points for the first time since its establishment on June 1, 1998, reducing the refinancing operation interest rate to 1.25%, the deposit interest rate to 0.75% and the marginal funding rate to 1.50%.
Looking at the details of the meeting minutes, it is stated that the members of the ECB Board of Directors agreed that it would be appropriate to take a step towards normalizing the monetary policy, while it is evaluated that the inflation is very high and it is likely to remain above the percent target for a long time. However, it was emphasized that it is unlikely that inflationary pressures will decrease on their own, and that the figures for core inflation have risen strongly.
Underlining that supply shocks, especially energy prices, are the driving force in the current high inflation, it was stated that inflationary pressures may increase due to the depreciation of the euro.
While it was pointed out that many members considered a 75 basis point tightening as appropriate under the high inflation outlook, it was reflected that this would make a significant contribution to meeting the 2% inflation target. It was reported that some members, in addition to reducing inflationary pressures, also drew attention to the risk of recession, and in this context, they argued a 50 basis point increase in interest rates.
In the report, which stated that the expected weakening in economic activities will not be enough to reduce inflation significantly, it was underlined that a very aggressive response could worsen the recession risks. However, it was also reflected that acting strongly at the moment may prevent the need to increase interest rates sharply in the future.
In the report, it was noted that most Board Members called for rapid normalization of monetary policy so that inflation repeatedly hovered above expectations and the upward revision in inflation expectations would remain constant at the target level of 2% in the medium term.
One Step Back: One Step Back: In its September monetary policy meeting, the ECB revised its inflation forecasts upwards to 8.1% for 2022, 5.5% for 2023, and 2.3% for 2024.
In the text, it was pointed out that the ECB Officials are aiming to raise interest rates in a few more meetings in order to reduce demand and counter the risks of an upward shift in inflation expectations.
Finally, it was stated that the Board of Directors will adopt a meeting-based approach in the determination of interest rates and that the decisions to be made will be taken depending on the developing inflation outlook and macroeconomic data.
