Publications

Carsten Brzeski’s blog

Eurozone: ECB minutes show some discord in EuroTower

The minutes of the ECB’s December meeting have further reduced the likelihood of new ECB action any time soon.

Since the December meeting, speculations have been ongoing on why Mario Draghi delivered less than most market participants had expected. While several ECB members had blamed media reports and misguided expectations by analysts for the mismatch, it remained unclear why ECB president Draghi had somehow changed his mind in the days ahead of the December meeting. Yesterday’s ECB minutes shed some light on this issue as they showed a growing discord within the ECB on the strength of the recovery and the risk of deflation.

The minutes released yesterday showed that the measures announced on 3 December were exactly the same measures proposed by ECB chief economist Peter Praet during the meeting. Still, the ECB discussed measures going beyond Praet’s proposals, suggesting that markets had not misinterpreted Draghi’s comments ahead of the meeting. It is only that there was simply no majority in favour of doing more. To the contrary, “some” ECB members did not see a “sufficient case for further policy action”, pointing to the ongoing recovery and gradual, medium-term increase of inflation. Amongst the opponents of further measures, “a few” members were at least willing to cut the deposit rate by more than the proposed (and actually decided) 10bp.

Judging from the minutes, it seems as if there is a growing discord or divergence on the outlook for growth and inflation. While a majority still pointed to the downside risks to growth and inflation, “some remarks” were made pointing to the improvement of underlying inflation and the cyclical recovery.

In sum, the discord on the macro-economic assessment and consequently differing views on the right policy answer at the December meeting have in our view further reduced the likelihood for any new ECB action at next week’s meeting, except maybe for some dovish remarks. It currently would need a more substantial deterioration of the outlook for growth and underlying inflation before the ECB would act again.