(Bloomberg) -- Risk-management considerations were a key reason the European Central Bank decided to bring forward an interest-rate cut last month, an account of their last policy decision showed.
“If the slowdown signaled by indicators of economic activity and the downside surprise to inflation proved to be temporary, a decision to cut rates now could, ex post, turn out as merely having brought forward a December cut,” according to the summary, published Thursday. “As such, there was little risk associated with cutting, especially given that interest rates would remain in restrictive territory and continue to support the disinflationary process.”
The ECB’s decision to accelerate a rate reduction in October came as concerns grew about the euro area’s growth outlook and inflation slowed more than forecast. Afterwards, there was even talk about a possible half-point move at subsequent meetings, though another cut by 25 basis points remains the most likely outcome in December.
Finnish central-bank governor Olli Rehn told Bloomberg Television this week that disinflation is “well on track” and that the growth outlook “seems to be weakening,” strengthening the case to loosen policy again next month. Latvia’s Martins Kazaks said lowering borrowing costs step by step is the “most appropriate” scenario at this point.
Other key comments from the ECB’s account:
On Interest Rates
- “If the recent data signaled a more persistent weakness, which confirmed a stronger disinflationary process, cutting today would be justified as a timely adjustment of policy to changing macroeconomic conditions”
- “This reasoning also meant that the risks from cutting at the present meeting and potentially being too early were lower than the risks of waiting and potentially acting too late”
- “A few members initially expressed a view that they would have preferred to accrue more information and to wait until December, when a comprehensive assessment of the medium-term outlook for inflation was available”
- “However, these members could see the precautionary risk management case for cutting now, and thus expressed their readiness to support the proposal”
- “There should be no pre-commitment to a particular rate path – the need for full optionality for the period ahead was reiterated – in order to be free to respond as necessary”
- “It was underlined that the speed at which the degree of restrictiveness should be reduced depended on the evolution of incoming data, which should continue to be evaluated against all three of the established elements of the reaction function”
- “It was argued that the closer rates were to neutral territory, the more cautious one would have to be that monetary policy did not itself become a factor slowing down the pace of disinflation”
On Inflation
- “There was increasing confidence that inflation would converge to the 2% medium-term inflation target in a timely manner”
- “The disinflationary trend was getting stronger, becoming more robust and gaining momentum”
- “There were also initial signs of improvement in services inflation, as well as indications that services and domestic inflation would decline materially in the coming year”
- “Among measures of underlying inflation, only domestic inflation continued to be substantially above 2%. Comfort could also be drawn from the recent performance and stability of the staff inflation projections, which had improved over the past year”
On the Economy
- “It was noted that the negative news came mainly from soft survey data, while new hard data had been limited and had been giving contradictory signals. Reference was made in this respect to the upward surprise in industrial production for August, which contrasted with the weaker PMI survey for September”
- “Questions were raised on the consumption-led growth in economic activity in the projections, with the data pointing to a substantial increase in the saving rate instead”
- “Different explanations were offered for the increase in the saving rate. These included relatively elevated interest rates encouraging a postponement in consumption, savings set aside for refinancing fixed rate loans – taken out in times of very low interest rates – at higher interest rates, as well as the uncertainty related to the outlook for fiscal policies”
- “The labor market had remained resilient. The unemployment rate had stayed at the historical low of 6.4% in August. However, surveys pointed to slowing employment growth and a further moderation in demand for labor”
- “The concern was raised that, with companies starting to shed labor in some countries, a tipping point could be reached”
On Communication
- “In its communication, the Governing Council should therefore continue to refrain from giving guidance about the speed and scale of monetary easing at future meetings”
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