ECB Insight: Meeting Account Reveals Widening Differences on Governing Council

12 July 2021

By David Barwick – FRANKFURT (Econostream) – The account released Friday of the June 9-10 monetary policy meeting of the European Central Bank’s Governing Council showcased opinions that differed more starkly than at any other recent such gathering, setting the stage for a potentially strident reunion at the next such occasion in ten days.

Although ECB President Christine Lagarde at the press conference following the June meeting had papered over the yawning chasm between competing perspectives, the account fully confirmed, as had been speculated in this space at the time, ‘that the hawks put up stiffer resistance today than Lagarde let on.’

In its characteristically sterile language, the account, which can be assumed to understate the case, time and again makes evident the behind-the-scenes assertiveness of the hawks, so quiet before the meeting.

It was thus observed during the discussion that the euro area recovery was not yet as robust as in other jurisdictions, but as related by the account, this prompted the rejoinder that the other side of the same coin was that the inflation these other economies were seeing ‘could be a harbinger of developments in the euro area further down the road.’

Tellingly, it was more than a matter on June 10 of the usual ECB pessimism repeatedly running up against a more optimistic take; rather, the hawkish reading of the situation actually appears at times to have set the tone that day, judging by its unaccustomed prominence in the account.

For example, while the account indicates that Council members generally endorsed the newly revised staff GDP projections for growth, its reporting of the discussion of growth is dominated by stubborn references to the improved situation.

‘It was widely acknowledged that incoming information and data had been favourable and bolstered confidence in the expected economic recovery’, the account said. ‘It was underlined that there had been a string of positive surprises in the euro area since the March monetary policy meeting.’

The discussion further noted ‘significant progress’ in containing the pandemic and vaccinating citizens before someone present called the new growth forecasts into question by saying that the upward revisions ‘looked modest’ next to the story told by recent indicators.

The account continues in the same vein, with the observation made that the 1Q upside growth surprise needed to be reflected in the outlook and would lead the output gap to close sooner.

It goes without saying that the other side also made its points, but if the ink the ECB devoted to previously minority arguments is any indication, the forthrightness of the hawks was also on full display during the discussion of risks to growth, with the corresponding section of the account giving hawkish views top billing for a change.

In the context of that discussion, a Council member drew attention to the fact that GDP forecasts were steadily being revised up despite the supposedly predominant downside risks. The new baseline scenario was better than that of March and the progression of growth projections towards the pre-pandemic trajectory suggested milder-than-expected scarring, someone said.

Moreover, the lack of revision to the 2023 GDP forecast and the fact that 2022’s upward correction on carry-over effects from 2021 ‘suggested further upside risks beyond the short term’, one or more members felt, while the risks associated with financial amplification had lessened.

Inflation was a key battleground, with one or more Council members wondering aloud whether supply constraints and input price inflation might generate more consumer price growth over time; although retail prices were normally not affected sharply by intermediate-stage pressures, reasons were seen why ‘the current situation could be different from the past’.

‘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.’

Indeed, the account indicates that the hawks prevailed in this regard, and the summary of this part of the discussion reports that the ECB’s 2023 HICP projection ‘was widely seen as subject to upward risks.’

This is a marked sharpening of tone since the April 21-22 meeting, the account of which related merely that ‘a view was expressed’ that medium-term inflation risks ‘could be assessed as tilted to the upside.’

In the end, the account implies that the policy stance was reconfirmed only out of an abundance of caution, captured in the sentiment ‘that any change in net purchases not based on a clear improvement in the medium-term inflation outlook would lead to an unwarranted tightening of financing and financial conditions and cast doubt on the Governing Council’s resolve to bring inflation back to its aim.’

Even so, the account devotes an entire and relatively lengthy paragraph to the opposition, which argued that reducing the purchase pace was only fair in light of the improved outlook, that financing conditions were more favourable than in March or December and that the rise in the natural rate of interest due to brighter economic prospects would by itself constitute additional accommodation.

Someone took advantage of the occasion to point out as well that the pandemic emergency purchase programme (PEPP) ‘was an emergency programme with a limited time span’, and cautioned about possible unintended consequences ‘if the highly accommodative monetary policy stance was maintained much longer’.

The ‘broad agreement’ reached by the Governing Council in favour of the April monetary policy decision eroded visibly in June, with the account only able to report rather weakly that ‘most members’ backed the outcome.

The bottom line is that the doves got what they wanted in June at the price of not merely deeper scepticism on the part of those who already questioned the ECB’s stance anyway, but significantly broader doubts on the Council as to its appropriateness.

An open question is the degree to which the Council sees its revised framework as conferring new validity on the policy stance and perhaps even arguing for more of the same. The outcome of the strategy review – the timing of which seems to have been no less strategic than the review itself – undoubtedly plays into the hands of the doves, coming as it does at a juncture when the need to alter course was looming larger.

With its acknowledgment of the potential for ‘a transitory period in which inflation is moderately above target’ and the implied revision of the ECB's forward guidance, the new strategy seems likely to buy the doves a bit more time to resist the increasingly assertive hawks.

But the doves have to be careful not to overplay their hand. The hawks have been reluctant for some time and yet have gone along dutifully with policies they now see their doubts about as justified. They may not see the strategy review as requiring more than some tweaking of the forward guidance for now.

Lagarde herself in introducing the new strategy stated that she did not ‘think that by having this simple and solid 2% we are actually pushing out the potential tightening that would take place’. This was a bit disingenuous, but if nothing else may point to heightened awareness on her part of the need to accommodate the hawks.

The doves also have the delta variant going for them, as it vividly reinforces the idea that the recovery remains subject to the pandemic and the pandemic is far from being fully contained. As such, and given the new strategy, July 22 should be nothing if not a much more interesting meeting than would have been thought possible in the absence of new staff forecasts.