ECB Officials Saw Rate Level As Robust Enough To Manage Shocks

European Central Bank officials saw the existing level of borrowing costs as sufficient to deal with possible jolts to the economic outlook, according to an account of their October meeting.

Among developments that could shift the baseline scenario for the euro zone were dangers to inflation in both directions, the summary — published Thursday — showed.

“Maintaining policy rates at their current levels would allow for more information to become available to assess the risk factors,” the account said. “It was also argued that the current level of policy rates should be seen as sufficiently robust for managing shocks.”

Inflation near 2% and a strengthening euro-zone economy have convinced a majority of ECB policymakers that interest rates don’t need to be adjusted from their current level of 2%. Investors expect the deposit rate to be maintained in December, though fresh quarterly forecasts could point to inflation undershooting the target in the year ahead.

Other key comments from the central bank’s account of its October 29-30 meeting:

“The Governing Council’s medium-term orientation meant that it was important to avoid an excessive focus on the very near-term outlook even though the Governing Council had a clearer view of the outlook over those shorter horizons”

“The December meeting would also allow the Governing Council to update its assessment of the distribution and intensity of risks. In this regard, there were open questions related to how monetary policy should factor in these risks, as well as the extent to which the Governing Council should respond to any shift in the distribution of risks, and not only to their manifestation”

“The view was expressed that the rate-cutting cycle had come to an end, since the current favorable outlook was likely to be maintained unless risks materialized”

“At the same time, the view was also expressed that it was important to remain entirely open-minded on the possible need for a further rate cut, and that such a move was likely to be warranted if there were an increase in the likelihood or intensity of downside risk factors, or if the projected undershooting of the inflation target became sustained”

“The transmission of monetary policy continued to be smooth and effective. Past interest rate cuts and the associated looser financial conditions should continue to underpin investment, and thereby support the recovery”

“Looking ahead, members reflected on possible strategies for future monetary policy. By the time of the December meeting there would be further important information on how recent shocks were affecting the inflation and growth outlook, and a new set of staff projections would be available. These projections would cover 2028 for the first time”

“It was also argued that the information content of the projections was lower for more distant horizons and monetary policy could have less influence at that horizon, which suggested placing more weight on the nearer-term outlook”

“While future projections could be affected by new assumptions on the introduction of ETS2, it was important to maintain focus on the fundamental drivers of underlying inflation”

“Without the expected upward effect of the EU Emissions Trading System 2 on projected inflation in 2027, a sustainable return of inflation to target after the expected undershoot in 2026 would be further delayed.”

“The economy was generally seen as showing signs of being more resilient than had previously been expected, even though it was still growing modestly and currently operating below its potential”

“More broadly, it was noted that the euro area economy had persistently fallen short of projections over the past few years”

“The economy was expected to benefit from consumers spending more as real incomes rose. However, aggregate consumption growth had so far remained relatively modest”

“Although some effects coming from higher tariffs were already visible, particularly with regard to exchange rates (where a fast reaction would usually be expected), the full impact on euro area exports and manufacturing investment, in terms of both volumes and prices, would only become visible over time”

“It was also noted that the dollar had been broadly stable over the past four months and that risk reversals suggested that risks to the level of the euro exchange rate were more balanced than at the time of the previous meeting”