ECB Minutes Show Large Majority Of Policymakers Favored 50 Bps Hike In March

A large majority of policymakers on the European Central Bank Governing Council favored a 50 basis point hike in March to avoid further uncertainty in the backdrop of the recent banking crisis and also because inflation continued to stay well above the bank’s target, minutes of the latest rate-setting session showed Thursday.

In March, the Governing Council, led by ECB President Christine Lagarde, hiked its interest rates by 50 basis points as policymakers expect inflation to remain “too high for too long”.

“It was acknowledged that in the current situation of heightened uncertainty a decision had to be taken with imperfect information,” the minutes of the March ECB policy session said.

Risks were seen on both sides, the bank said.

“However, following the announced intended interest rate path was seen as important to instill confidence and avoid creating further uncertainty in financial markets,” the minutes said.

“Overall, delivering a 50 basis point increase was considered to be proportionate, taking into account possible side effects,” the bank added.

Those who opposed a hike in March felt that the ECB’s data-dependent approach to policy would in the current situation suggest postponing the interest rate hike and waiting until uncertainty had declined.

The March 15-16 policy session took place after the banking crisis in the US and Europe. In the US, the Silicon Valley Bank collapsed and some others including the First Republic ran into trouble.

Part of the blame fell on the Federal Reserve for its aggressive rate hikes over the past year that made some long-term bonds unattractive.

In Europe, Switzerland’s Credit Suisse had to be rescued by its rival UBS after shares of the former tanked due to a crisis of confidence caused by remarks made by its largest investor.

ECB rate-setters expressed confidence that the euro area banking sector was resilient, with strong capital and liquidity positions, the minutes said.

Members stressed that pockets of financial vulnerability had to be expected in the context of tighter monetary policy and elevated market volatility is likely to persist as more banks would come under the scanner.

“It was argued that, in assessing financial stability risks, it had to be considered that the transmission of monetary policy impulses was likely to be stronger at times of market stress than in calmer times,” the minutes said.

Policymakers also assessed that if the inflation outlook embedded in the March ECB staff projections were confirmed, the Governing Council would have further ground to cover in adjusting the monetary policy stance to ensure a timely return of inflation to target.

Latest data from Eurostat confirmed this week that Eurozone inflation eased to a 13-month low of 6.9 percent in March, driven by the fall in energy prices. However, core inflation rose to 5.7 percent.

“The fact that there are still no signs of any disinflationary process, discounting energy and commodity prices, as well as the fact that inflation has increasingly become demand-driven, will keep the ECB in tightening mode,” ING economist Carsten Brzeski said.

The growing divide within the ECB, signaled in the latest minutes, is probably the best argument for a compromise of a 25 basis points rate hike in May, the economist added.

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