ECB Meeting Account Shows 2023 HICP Forecast Widely Seen as Subject to Upward Risks

9 July 2021

By David Barwick – FRANKFURT (Econostream) – The account of the European Central Bank’s policy meeting of 9-10 June, released by the ECB on Friday, indicated a growing lack of confidence among Governing Council members that inflation would undershoot the price stability objective to the extent projected.

Although Council members ‘widely agreed’ to see through short-term higher inflation, the view was expressed that ‘companies had less scope for absorbing pipeline pressures in their margins, after a long period of subdued profits, while the marked pick-up in demand might offer an opportunity to adjust prices.’

‘A greater than usual pass-through to the final consumer stages might also be possible if households were prepared to pay higher prices in the light of ample savings accumulated involuntarily during the pandemic’, the account said. ‘Against this background, it was argued that there could be upside risks not only over the shorter term but also over the medium term.’

The account cited an array of factors with the potential to boost inflation over the medium term and said that ‘[f]or these reasons, projected inflation of only 1.4% in 2023 was widely seen as subject to upward risks.’

According to the account, one or more members of the Council felt that higher inflation such as in the US ‘could be a harbinger of developments in the euro area further down the road.’

The account made clear that the discussion of growth also included more hawkish views than in the recent past. The positive nature of incoming economic data was ‘widely acknowledged’ by Governing Council members, with attention drawn to the ‘string of positive surprises in the euro area since the March monetary policy meeting.’

Some of those in attendance were apparently dissatisfied with the updated staff macroeconomic forecasts: ‘The point was made that the upward revisions to growth in the June staff projections looked modest compared with the recent improvements in some indicators’, the account said.

The better-than-expected 1Q outcome ‘would still need to be factored into the outlook and would imply a faster closing of the output gap’, one or more Council members argued, the response to which was that ‘the outcome had been better than expected only in parts of the euro area.’

The theme that the Governing Council might be too pessimistic emerged again in the discussion of risks to growth, when it was observed that repeated upward forecast revisions stood in contrast to the previous assessment of downside risks and that the new baseline scenario was better than the previous one.

‘Also, it was noted that the GDP projections had been moving successively closer to the pre-pandemic trajectory and it was argued that, from that perspective, scarring effects seemed to be turning out less pronounced than had been initially feared’, the account reported.

Chief Economist Philip Lane’s summary of the economic situation included the observation that ‘forward-looking survey data indicated the start of a significant rebound in the second quarter’ that ‘should accelerate in the third quarter’, leading to pre-pandemic output levels in 1Q of 2022 and thus one quarter earlier than the March forecasts had implied.

Much uncertainty was expressed however about post-lockdown consumption, with questions left open about the magnitude of pent-up demand and about how much excess saving could be devoted to consumption rather than debt repayment or other purposes.

The section of the account on Board member Isabel Schnabel’s presentation called the mild steepening of the yield curve observed since the previous Governing Council meeting, ‘a typical phenomenon of an economy on the verge of recovery.’ The steepening was attributed primarily to more rapid vaccination progress and the fact that economic reopening had been ‘considerably faster and economically stronger than most analysts had expected.’

‘The data for the euro area in recent weeks had persistently surprised market analysts to the upside’, the account said. ‘This stood in sharp contrast to the period before the March meeting, when spillovers from outside the euro area had been the main driving force.’

Still, when it came time to decide what to do, ‘[w]hile it seemed appropriate that the improved outlook should be reflected in the Governing Council’s policy stance, financing conditions were assessed as too fragile to allow a meaningful reduction in the pace of purchases without risking a disorderly rise in yields’, the account said.

At least one member fretted that if the ECB slowed the pace of asset purchases without being able to point to a clear improvement in the medium-term inflation outlook, then financing conditions would tighten undesirably and markets would question the ECB’s willingness to restore price stability.

‘In this context, a remark was made that, in view of the persistent inflation shortfall projected in the June staff projections, even an increase in asset purchases as the main monetary policy instrument could be justified at present’, the account reported.

Arguments for a slowdown of the purchase pace ‘as a matter of symmetry and consistency in decision-making’ against the backdrop of brighter economic prospects did not dissuade ‘most members’ from joining ‘a broad consensus’ to reconfirm the existing policy stance, the account said.