European Central Bank officials went ahead with their expected quarter-point increase in interest rates after the possibility of a bigger move had been raised, according to an account of their June policy meeting.
(Bloomberg) — European Central Bank officials went ahead with their expected quarter-point increase in interest rates after the possibility of a bigger move had been raised, according to an account of their June policy meeting.
“A very broad consensus supported the 25 basis-point rate increase,” the account published Thursday said. “A preference was also initially expressed for raising the key ECB interest rates by 50 basis points in view of the risk of high inflation becoming more persistent.”
Behind the suggestion of a larger hike may have been concerns over underlying inflation, which has become the focus of policymakers as overall price gains have abated.
“While members considered that the second consecutive decline in core inflation was a positive signal, it was widely felt that there was as yet no sufficient or convincing evidence to confirm a turning point,” the account said.
The ECB has said it’s very likely to raise rates again at its next meeting, in two weeks, as underlying price growth — at 5.4% — remains far above the 2% target.
What happens beyond that remains open. Officials have recently struck a cautious tone, saying the next steps depend on incoming data. Vice President Luis de Guindos has said that core inflation is showing signs of softening, while Chief Economist Philip Lane highlighted that the transmission of past hikes through banks will gain strength.
Other comments from the ECB’s account:
On Interest Rates:
- “Emphasis was put on the merit of sticking to a data-dependent, meeting-by-meeting approach in an uncertain environment, particularly as rates were moving closer to a possible peak level”
- “The view was held that the Governing Council could consider increasing interest rates beyond July, if necessary”
On Inflation:
- “Indicators of underlying price pressures remained strong, although some showed tentative signs of softening”
- “Doubts were expressed about whether a particular emphasis on core inflation was justified, as it was not seen to be a leading indicator of future headline inflation”
- “The extent of the upward revisions to the inflation outlook “was also questioned, in the light of the latest, more encouraging data and with respect to changes in the assumptions underpinning the June projections compared with the March projections”
On Policy Transmission:
- “The accumulated policy tightening was increasingly taking hold in the economy, as the tighter monetary-policy stance seemed to be gradually felt in real activity”
- “Overall, the recent contraction in credit had exceeded the scale indicated by historical patterns”
On the ECB’s Balance Sheet:
- “A very broad consensus also prevailed in favor of confirming the end of reinvestments under the APP as of July, as proposed by Mr Lane, although a preference was also expressed for deferring the decision to a later date, after the effects of the June TLTRO III repayments on banks’ liquidity had been assessed”
- “Preserving the option to apply flexibility to reinvestments under the pandemic emergency purchase program as a first line of defense against fragmentation risks continued to be warranted”
(Updates with further comments from account in bullet points.)
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