Emphasis on stagflation in ECB minutes


The minutes of the monetary policy meeting of the ECB Governing Council held in Frankfurt on 9-10 March 2022 have been published.

In the minutes of the council members’ evaluations, it was revealed that the members evaluated that the preconditions for the rate hike were largely met or very close to being met.

In the minutes, it was reported that the majority of the members emphasized that they maintain the outlook for the current level of inflation and spoke in favor of urgent additional steps to normalize the monetary policy.

The minutes stated, “The majority of members were of the opinion that the current level and persistence of high inflation required urgent additional steps towards monetary policy normalization.”

Despite this, members required the ECB to keep options open.

In the minutes of the March meeting, in which monetary policy makers emphasized that the war in Ukraine created too much uncertainty, some members said that the war “by slowing the economy, raising energy prices, and high in the short run.”

In addition, it was cited in the minutes that some members argued that economic growth would probably remain positive, therefore stagflation, which is a period of high inflation with stagnation in the economy, is unlikely.

minutes While noting the concerns of the members that the increase in consumer prices and labor wages might lead to the start of the wage-price spiral, it was stated that the members expected the effect of future wage increases to last longer and even accelerate.

Next meeting on April 14

ECB, in line with market expectations despite high inflation amid heightened uncertainty with Russia’s attack on Ukraine on March 10, interest rates remained unchanged.

The bank kept the policy rate at zero, the deposit rate at minus 0.50 percent and the marginal funding rate at 0.25 percent.

Meanwhile, markets are pricing in a 60 basis point increase in deposit rates, which is minus 0.50 percent this year. The next meeting of the ECB Governing Council will be held on April 14.

stagflation with the Russia-Ukraine war

stagflation, known as “the coexistence of stagnation in economies and high inflation”, is the fact that OPEC member countries tripled their oil prices in the 1970s. The result was seen in advanced economies.

As of today, the recovery in developed economies that are already struggling with high inflation after the Kovid-19 epidemic is not at the desired level, the rising prices of goods and services as a result of the disruptions in the supply chain, the geopolitical risks rising with the Russia-Ukraine war, as well as the excessively high commodity, oil and gas prices. When gas prices were added, the possibility of going towards stagflation started to be discussed more.

The existence of problems reminiscent of 51 years ago causes an increase in the number of economists who warn about stagflation.

Economists, who do not ignore the possibility of stagflation, draw attention to developments that point to the rise in inflation expectations and the existence of a longer-term inflationary environment. Economists say that risks such as disruption in the supply chain, high oil and natural gas prices, and the persistence of problems in the labor market should be taken seriously and governments should implement supply-side measures.

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