MNI BRIEF: ECB May Hike Compromise As Council Split On Data

Hawks and doves on the ECB's Governing Council agreed that further rate hikes would be needed to tame inflation, while cautiously announcing the end of APP reinvestments, the release of the May meeting accounts show.

A “large” number of Governing Council members saw price stability risks as tilted to the upside, while others saw them as more symmetrical as policymakers differed in their interpretations of a wide spectrum of incoming data. The contribution of wages to current and future inflation levels was a key point of contention, as were the nature of the relationship between headline and core inflation, and the latter’s usefulness as a proxy for underlying price dynamics, the account notes.

Although “a number” of members supported raising rates by 50bps, “almost all” were prepared to accept a 25bps hike on condition that the ECB convey a clear “directional bias” in favour of further hikes should the present inflation outlook persist (see MNI SOURCES: Most At ECB See 4% Rate As Only Outside Chance).

Markets were “widely” viewed to have priced in the full run-off of reinvestments from APP, with members noting that reabsorption even during the March market turbulence had proven particularly smooth. But there were also expressions of concern that the pace of balance sheet reduction should proceed too quickly given its minimal contribution to price stability. Coming at the same time as the June TLTRO III repayment, a liquidity squeeze could not be entirely ruled out, it was argued.