ECB accounts show lingering inflation worries

FRANKFURT (Reuters) - Euro zone inflation was heading back to target but there were still some worries about it, warranting caution in signalling further policy easing, the European Central Bank concluded last month, according to the accounts of its January 29-30 meeting.

The ECB cut rates in January for the fifth time since June and hinted at even more policy easing, arguing that inflation was now well on its way back to its 2% target and there was no more need to restrict economic growth.

Sources told Reuters after the January meeting that a further rate reduction was likely in March, but any move in April and beyond would be subject to a more heated debate.

"Members concurred that the disinflationary process was well on track," the ECB said in its account. "(But) there was some evidence suggesting a shift in the balance of risks to the upside since December."

It added that some policymakers argued for "greater caution" on the size and pace of further rate cuts as policy rates were approaching the neutral level that neither spurs nor stifles economic growth.

Investors now expect the ECB to cut the deposit rate by another 25 basis points at its meeting next Thursday and see two more moves later in the year, taking the benchmark rate to 2% by the close of 2025.

While the ECB did not make any explicit commitment to further rate cuts, it said the current rate was still restricting growth and a move towards a more neutral setting was possible if inflation was under control.

"As long as the disinflation process remained on track, policy rates could be brought further towards a neutral level to avoid unnecessarily holding back the economy," the ECB said in the accounts.

The debate over cuts beyond March is likely to intensify in the coming weeks, partly because of opposing trends that may pull inflation in different directions.

Persistently weak economic growth and a sharp slowdown in wage growth are both likely to temper price pressures. However, energy costs are rising, the euro is weaker and a looming trade war with the U.S. could all push consumer prices up.

Diverging views between the ECB's hawks and doves -- who respectively favour higher and lower rates -- were already starting to surface in January.

Board member Isabel Schnabel, the most prominent hawk on the Governing Council, emphasised surveys showing "a bigger risk of an inflation overshoot than of an inflation undershoot" during her presentation on market developments.

But Chief Economist Philip Lane, who illustrated the latest economic data and is generally seen as a dove, highlighted that "the expectations of larger firms that were aware of the ECB’s inflation target showed convergence towards 2%".

Other members of the Governing Council, who are not named in the accounts, even suggested inflation might fall short of that goal if the economy continued to perform worse than the ECB expected.

(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Susan Fenton)