European Central Bank policymakers agreed last month that inflation is coming under control but any talk of rate cuts was premature given rapid wage growth and abundant underlying price pressures, published accounts of their meeting showed.
The ECB left policy unchanged at the Jan 24-25 meeting and its president Christine Lagarde pushed back on talk of interest rate cuts, arguing that price pressures remained abundant, so there was no room for any talk of policy reversal.
"All in all, members signalled that continuity, caution and patience were still needed," the ECB account of the meeting showed. "There was broad consensus among members that it was premature to discuss rate cuts at the present meeting."
But policymakers also seemed more optimistic about inflation prospects than at any time in years.
"For the first time in many meetings, the risks to reaching the inflation target were seen as broadly balanced or at least becoming more even," the ECB's minutes published on Thursday showed.
Disinflation was proceeding as expected and the ECB was likely to cut its own projections in March, particularly due to lower energy prices, policymakers added.
But this alone was not sufficient to reverse the central bank's historic policy tightening, especially since wage growth remained strong and unit labour cost was sharply higher due in part to a slump in productivity.
"While the initial inflation shock had largely reversed, the task that lay ahead was the reversal of second-round effects, which might prove to be more stubborn," the ECB added.
If the ECB did not get inflation back to target now and price growth overshoots, the reputational cost would be higher and the difficulty in taming prices greater, policymakers said.
Rate cut expectations have been on rollercoaster this year. Markets at one point expected the ECB to start cutting as early as March and deliver 150 basis points of moves this year.
But concerted pushback, changed U.S. Federal Reserve expectations, hopeful growth figures and fresh detail on underlying inflation pressures cut that to just 93 basis points by Thursday, with the first move fully priced in only by June.
Policymakers added that rate cuts are not automatically warranted even if new projections due in March show some undershooting of the 2% inflation target, provided the miss was small and temporary.
Undershooting the goal was not an aim, however, even after years of exceptionally high price growth.
The ECB will next meet on March 7 and while no rate cut is seen, it is still likely to change its language, opening the door to policy easing at one of its upcoming meetings, with June now seen as the prime candidate for the first move.
"Members signalled that continuity, caution and patience were still needed, since the disinflationary process remained fragile and letting up too early could undo some of the progress made," the ECB said.
