FLORENCE, Italy/FRANKFURT (Reuters) -European Central Bank policymakers are preparing for something of a showdown at their next meeting in December, when new three-year projections will shed light on whether or not they risk undershooting their target, four sources told Reuters.
The European Central Bank kept interest rates unchanged at 2% for the third meeting in a row on Thursday and repeated that policy was in a “good place” as economic risks recede and the euro zone shows resilience in the face of uncertainty.
Policymakers were generally sanguine about economic growth but views differed when it came to inflation, which the euro zone’s central bank expects to slip below its 2% target next year before bouncing back in late 2027, the sources said.
The ECB will publish its first set of projections for 2028 in December and some policymakers thought that clear evidence pointing to a continued undershooting in inflation that year would justify debating a rate cut at the meeting, the sources said.
But others argued that long-term projections should be taken with a pinch of salt, given their track record, and in any case, a modest undershooting of just 20 or 30 basis points can be tolerated, the sources added.
An ECB spokesperson declined to comment.
HOW MUCH WIGGLE ROOM?
The debate is partly about how far the bank should be allowed to stray from its inflation target before policy needs to be adjusted.
The ECB’s strategy, published earlier this year, allows for some wiggle room but does not precisely define its extent because it is “context-specific and depends on the origin, magnitude and persistence of the deviation”, leaving policymakers with different views.
The ECB publishes point estimates for inflation as well as lower and upper bounds that represent the likely range of outcomes.
ECB President Christine Lagarde said at her news conference on Thursday that the central bank’s “good place” for policy was not “fixed” and policymakers would treat the risk of undershooting as seriously as that of overshooting — a principle known as symmetry.
(Reporting by Francesco Canepa and Balazs Koranyi; Editing by Ros Russell)
