FRANKFURT (Reuters) -The European Central Bank needed to cut interest rates cautiously and gradually but further policy easing was likely coming given weakening price pressures, policymakers concluded last month, according to the accounts of their Dec 11-12 meeting.
The ECB cut interest rates for the third time in a row in December and said that further reductions may be on the way as inflation could hit 2% around mid-year, even if the timing and pace of rate cuts was still up for discussion.
“This cautious approach was still warranted in view of the prevailing uncertainties,” the ECB said in the accounts on Thursday, which showed unanimous support for a 25 basis point cut after a brief discussion about a large cut.
“Nevertheless, if the baseline projection for inflation was confirmed over the next few months and quarters, a gradual dialling-back of policy restrictiveness was seen as appropriate.”
With the economy barely growing now, the ECB’s focus has shifted away from excessive price growth to anaemic activity, and a growing number of policymakers now argue for rates to fall at least to a level that stops holding back economic growth.
Policymakers, however, emphasized that more ‘check points’ had to be passed before concluding that inflation is indeed defeated, so they needed to retain optionality and avoid committing to any specific rate move.
That is why they removed a reference to needing to keep rates “sufficiently restrictive” without adding a new guidance, the accounts showed.
While there was a mild push for a bigger, 50 basis point rate cut given the weak growth outlook, policymakers concluded that many of the difficulties were structural in nature and monetary policy could not address these.
Policymakers also took a nuanced view on the so-called neutral rate, which neither slows nor stimulates growth.
Several policymakers have long argued that this level should be the next goal, but there was no reliable measurement for such a rate and it was subject to wide-ranging estimates.
“While the natural or neutral rate of interest was a useful analytical concept, available estimates could only be a rough gauge of the restrictiveness of monetary policy,” the ECB said.
“A gradual approach was needed to allow an assessment of whether policy rates had reached a broadly neutral level,” the accounts concluded.
Economists see the neutral rate in the 2% to 2.5% range but other estimates lie in the 1.75% to 3% range.
The ECB will next meet on Jan 30 and investors have fully priced another 25 basis point cut in its 3.00% deposit rate. The benchmark is then seen dropping further later in the year to end 2025 at 2%.
(Reporting by Balazs Koranyi, Editing by William Maclean and Toby Chopra)
