(Finance) – Eurozone central bankers believe there is concrete evidence that the monetary policy is transmitted to financial markets, financing conditions and credit conditions, with a “very impact probably stronger than expected“; however, uncertainty remains about the timing of the maximum impact, as well as the final overall effect of the tightening of monetary policy on the real economy and inflation. minutes of the monetary policy meeting of 24 and 25 January 2024.
Overall, members of the ECB Governing Council reported that they are “continuity, caution and patience are still necessaryas the disinflationary process remains fragile and slowing down too early could undo some of the progress made.” While the initial inflationary shock has largely been reversed, we need to look at second-round effects, which could prove more stubborn. At the same time time, policymakers expressed “increased confidence that inflation will be brought back to the 2% target in a timely manner.”
In this context, Council members underlined the fact that the ECB’s inflation target is symmetrical, which implies “need to avoid both undershooting and overshootingunless policy rates are close to the effective lower bound.” At the same time, some inflation volatility may occur on the way to reaching the 2% target and new shocks may materialize.
There was “broad consensus among members that it was premature to discuss rate cuts at the current meeting and members referred extensively to risk management considerations to support this view.” Indeed, “the risk of cutting policy rates too early was still seen as greater than that of cutting them too late” and having to reverse course, in If economic activity picks up more than expected, wage growth accelerates or new inflationary pressures emerge, it “could result in high reputational costs.”
It was also underlined that “the risk of an inadvertent tightening of monetary policy was mitigated by the fact that financial markets were already pricing in a series of cuts rates in 2024, contributing to an easing of both financial and financing conditions”. However, it has also been argued that “such an easing may be premature and could derail or delay a timely return of inflation to the target level”.