According to the minutes from the ECB’s March Governing Council meeting, a very substantial degree of monetary accommodation was still needed to secure a sustained convergence of inflation rates towards 2%.
Although deflation risks had been eliminated, there was insufficient confidence over inflation trend to consider any move towards normalization and that it was premature to make any changes to forward guidance.
The minutes also reiterated that a short-term spike in would be looked through if inflation deemed to be transient.
There was, however, agreement that both downside and upside risks to inflation continued to warrant close monitoring.
A discussion on policy normalisation would also become warranted if the Euro area economy continued to recover and inflation proceeded further on the Council’s aim in a sustained manner.
Since March’s monetary policy meeting, there have been source reports that the ECB was very reluctant to make any changes to policy or guidance at the April meeting. There were concerns over a jump in yields and according to these sources the ECB also considered that markets over-reacted to the change in March’s language.
ECB President Draghi has insisted that now is not the time to change monetary policy as there has not been a sustained increase in inflation.
Chief economist Praet has also maintained a dovish stance, although there have been more hawkish views from the German Bundesbank and it will be increasingly difficult to sustain the current policy if the Eurozone economy continues to strengthen.
The ECB Council and Draghi should be able to keep dissent in check and hold the line at April’s meeting, but the stage is set for a serious policy discussion and potential policy change in June.
The market reaction to the minutes was unimpressive.