MNI BRIEF: Dec ECB Account Shows GovCo Divided On Rates, QT

Governing Council members at the European Central Bank were initially divided over both the pace of interest rate rises and quantitative tightening, the official account of December’s monetary policy meeting shows.

Chief Economist Philip Lane proposed a 50 basis points at the present meeting, in conjunction with a clear statement that interest rates would still have to rise “significantly at a steady pace” in order to reach sufficiently restrictive levels, but appears to have stopped short of explicitly advocating further 50bps hikes at successive meetings. Other Council members spoke in favour of a 75bps rise in December, arguing that it sent a stronger signal, while doing less than 75bps would be seen as inconsistent with the ECB’s commitment to bringing inflation back to target in a timely manner.

Some hawks were prepared to support a 50bps hike as long as it was accompanied by “strengthened communication on the Governing Council’s policy intentions and the enhanced message that the Governing Council would continue raising rates significantly at a sustained pace,” while allowing the Council to keep raising rates for longer than markets were currently expecting.

Lane’s proposal the QT should average €15 billion per month until the end of the third quarter of 2023, with the Governing Council determining its subsequent pace over time, faced less opposition. Yet some members felt the move , combined with only a 50bps hike, was still insufficient, while others expressed a preference for reducing the APP portfolio at a faster pace or for terminating reinvestments altogether.