The ECB divided in March on the pace of the end of debt buybacks

Posted 08 April, 2022

Some officials were keen to open the door to a rate hike in the third quarter, according to the minutes of the Governing Council meeting.

The Governing Council of the European Central Bank was split at its March meeting over the pace of ending debt buybacks, with some officials keen to open the door to a third-quarter rate hike, according to minutes released Thursday.

“A large number” of officials “believed that the current high level of inflation and its lasting nature called for immediate measures”, explains the document reporting the exchanges between central bankers of the eurozone held in early March.

Taking a further step towards the normalization of its accommodative policy, the ECB then accelerated the pace of the gradual withdrawal of its debt purchases, citing their likely end in the third quarter. But this should not automatically and quickly lead to a rise in its key rates, she said.

However, "certain members" of the Board of Governors had expressed a "preference to define a fixed date this summer" for the end of the "APP" program of debt purchases, which "would open the way to an increase in interest rates in the third quarter in view of the deterioration in the inflation outlook".

For these officials in favor of a more determined tightening of credit conditions, the ECB runs the risk of acting too late against inflation.

On the other hand, some members of the Council have advocated a more cautious approach to the risk of a war-related recession in Ukraine.

These different options underline the divisions between on the one hand the "hawks", in favor of a rapid monetary tightening, and the "doves", in favor of a more flexible policy.

The discussions promise to be heated again between the supporters of these two lines, who will meet again for the next Board of Governors on April 13 and 14.

The March decision “was clearly a compromise,” said Carsten Brzeski, an economist at ING, but in general “the ECB leans more on the side of the hawks”.

"The Board of Governors is divided", especially on the duration of the surge in inflation, said his side Frederic Ducrozet, the analyst at Pictet. "But the hawks have the advantage."

In particular, officials have cast doubts on the forecast of a price increase of only 1.9% in 2024, as announced by the ECB. The eurozone is currently suffering from an inflation shock, with a record price increase of 7.5% in March over one year.

The Board of Governors, on the other hand, was unanimous on the need for additional fiscal measures from politicians “at the national and European level” to mitigate the impact of the war in Ukraine and the sanctions.

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