The interest rate cut by the European Central Bank (ECB) last month was seen as an insurance measure against unexpectedly low inflation, but policymakers were seen to be divided on the risk of price growth being too low, according to reports from their October 16-17 meeting which released on Thursday.
The ECB cut interest rates for the third time this year in October and made clear that further easing is coming given the weak economy and waning price pressures, although the timing and size of the policy move is still debated.
"Acting now can provide insurance against downside risks that could cause targets to miss further and support a soft landing," the ECB said, acknowledging that there was limited new information.
If these indicators are only a temporary shock and mislead expectations of weak inflation, the central bank could avoid cutting interest rates in December, according to the report.
"If the slowdown shown by economic activity indicators and the surprise drop in inflation prove to be temporary, the decision to cut rates now may, in retrospect, only predate the December rate cut," the ECB added.
However, the report also reveals differences of opinion on how weak the price pressure is.
Policymakers agree that inflation will reach 2% earlier than previously projected by the end of 2025 but there are differing views on what will happen after that.
One group thought that missing the target was not a possibility.
"This misguided scenario may require a combination of factors that do not yet exist," the report said.
"These include disappointing economic growth to the point of recession, weaknesses in the financial system, fading wage pressures and a downward shift in inflation expectations."
However, there is another group that thinks the problem is deeper and that the ECB risks being below its target, an outcome that the ECB considers something as undesirable as exceeding the target.
"On the contrary, some also suggest that the change in inflation projections has become more significant," said the report.
They argue that the surprise drop in inflation and the rapid change in market expectations indicate an increased risk of missing the target, perhaps persistently.
