ECB Minutes Show Call For Prudent Approach Amid Heightened Geopolitical Risks

European Central Bank policymakers saw the need for a cautious approach to normalization amid rising geopolitical risks and chose to wait for the macroeconomic projections in March to make a better assessment of the outlook for euro area, minutes of the latest rate-setting session showed Thursday.

“Geopolitical tensions had increased, and a prolonged phase of high energy costs constituted a material downside risk to consumer spending and investment, while also increasing cost pressures in energy-intensive sectors and elevating the risk of second-round inflation effects through higher nominal wage settlements,” the minutes, which the ECB calls the ‘account’, of the February 2-3 Governing Council session showed.

Less than a month from February’s policy-making session, the geopolitical situation, especially in Europe, worsened dramatically with the escalation of the Russia-Ukraine crisis.

During the February session, ECB warned that inflation could be higher than anticipated over the next few months if the surge in energy prices intensified, especially if geopolitical tensions were to escalate further.

Persistent sluggishness in oil supply and further extension of the bottlenecks in production and international commerce would also keep inflation higher.

Eurozone inflation accelerated further in February to hit a fresh record high of 5.8 percent, driven by energy prices, data from Eurostat showed earlier this week. Core inflation rose to 2.7 percent.

Beyond the near term, inflation could be higher than foreseen if current price pressures fed through into higher than anticipated wage rises, or if the economy returned more quickly to full capacity than considered likely at present, the ECB said.

ECB rate-setters expected the growth outlook to improve significantly in the latter part of this year.

ECB President Christine Lagarde’s comments following the February session had fueled expectations that policymakers were gearing up for an interest rate hike later this year.

The ECB Chief did not reiterate her earlier comment that an interest rate hike is unlikely this year, instead she stressed that risks to inflation are on the upside.

Policymakers stressed on the critical need for a gradual and flexible conduct of monetary policy, the minutes showed.

“To this end, there was a need to maintain sufficient optionality with respect to the time horizon for adjusting the Governing Council’s policy instruments in a data-driven manner,” the minutes said.

“In addition, heightened geopolitical risks were seen as calling for a very prudent approach to normalization.”

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