Lagarde won over most dissenters but two held out in ECB guidance debate -sources

FILE PHOTO: European Central Bank (ECB) headquarters building is seen in Frankfurt
FILE PHOTO: European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski/File Photo

July 22, 2021

FRANKFURT (Reuters) – A significant group of European Central Bank policymakers objected to the new interest rate guidance it gave on Thursday but most were won over and only two — the German and Belgian central bank chiefs — held out, four sources told Reuters.

The ECB said after Thursday’s meeting that it would not hike borrowing costs until it sees inflation reaching its 2% target “well ahead of the end of its projection horizon and durably”, a commitment Bundesbank chief Jens Weidmann and Belgium’s Pierre Wunsch objected to.

“It was an unusually robust debate, and a lot more than just two people voiced concerns, but most were eventually won over by (ECB President Christine) Lagarde,” one of the sources said.

A third policymaker, who also voiced significant objections, had to leave the meeting early and was not present at the final tally, one of the sources added.

The ECB, the Bundesbank and the National Bank of Belgium all declined to comment.

Those opposing the new guidance argued that it ties the bank’s hands for way too long as it would mean no interest rate hike for five years or more. They also said the guidance was convoluted and failed to meet the ECB’s goal of simplifying its communication.

Policymakers also held a lengthy discussion on whether the bank should strive for an inflation overshoot of its 2% target and some wanted a reference to “at least 2%” inflation in the official communication.

While policymakers decided against such a formulation, Lagarde still used the “at least 2%” phrase, causing minor annoyance among some policymakers, two of the sources said.

(Reporting by Balazs Koranyi; Editing by Catherine Evans)