A very large number of European Central Bank members agreed at the last meeting that it is appropriate to raise interest rates by 50 basis points, as suggested by chief economist Philip Lane, according to the minutes of the meeting released today.
As mentioned, the increase by 50 m.v. was deemed justified due to the deterioration of the inflation outlook since the June ECB Governing Council meeting.
Taking into account the new data, the Board of Directors he thus took a bigger first step than he had signaled in his previous meeting, in the course of normalizing interest rates.
According to the minutes of the meeting, the move was seen as providing a clear signal of the ECB’s determination to act in order to fulfill its mandate.
However, it appears that some members of the ECB were in favor of a milder increase of 25 basis points, as announced at the June meeting.
Based on the risks of a recession emerging, it was argued that an increase of 25 bp. is more in line with a gradual easing of monetary policy, while it would be compatible with a return of inflation to the 2% target over the medium term once the temporary turbulence fades. In addition, concern was expressed that if the ECB deviated from its previous guidance it would surprise the markets and add uncertainty.
Nevertheless, it was judged that the ECB had to show that it is willing and able to respond to changes in the outlook. It was also argued that a rate hike of 50 bp. would provide greater clarity to market participants amid a highly uncertain environment. In addition, the monetary policy stance was judged to remain accommodative even after a 50bps rise.
On future ECB action, both in September and beyond, according to the minutes of the July meeting, there was widespread support for Philip Lane’s proposal to move to a “meeting-by-meeting” approach, which would effectively mean the end of forward guidance.
As noted, although forward guidance was a powerful tool when interest rates were at the bottom, its usefulness was significantly reduced during the normalization phase.
In the current environment of extremely high uncertainty, the forward guidance on the path of interest rates was judged to limit too much the possibilities, flexibility and reliance on data for the ECB, carrying the risk of committing itself to decisions that would have to be reversed later if they changed the conditions.
Source: Capital
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