The ECB’s ‘Reaction Function’ Clarified In March Minutes

The ECB’s last news conference left many market participants a bit puzzled about the ECB’s exact reaction function. The just-released minutes of the meeting shed more light on what the bank's thinking.

ECB President, Christine Lagarde

Here are the most remarkable passages from the ECB’s minutes:

  • Risks to the growth outlook had become more balanced. This was a significant change in the communication after the March meeting. The minutes of the meeting illustrates that there must have been a lively debate, almost as in any economic research department currently, with some ECB members pointing to more positive factors for growth and others to more negative factors. It is remarkable how often reference was made to the US fiscal stimulus as a potential source of higher growth in the eurozone. Remember that during the press conference, ECB president Christine Lagarde had simply said that the Biden plan had not been factored into the ECB staff projections. This is technically correct, but it would not have been the first time that the Governing Council could have taken a slightly different stance on the economy than the staff projections. But they didn’t.
  • As for inflation, it is still remarkable that the Governing Council seems to have been surprised by the higher inflation prints since the start of the year. However, higher inflation is still mainly seen as a temporary phenomenon.
  • The decision to front-load asset purchases was not unanimous, as the phrase “there was broad consensus among members that the recent rises in risk-free rates and GDP-weighted sovereign bond yields required a scaling-up of the pace of the purchases under the PEPP.”
  • There will be a quarterly assessment of financing conditions and the inflation outlook “in order to determine the pace of purchases needed to keep financing conditions favorable”. It remains to be seen whether financial markets stick to such a quarterly rhythm. We would argue that markets tend to be a bit faster.
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