ECB: To Normalise Monetary Policy on a Meeting-to-Meeting Basis; Price Pressures Spreading

4 August 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will continue to normalise policy, but will do so on a meeting-to-meeting basis, the ECB said on Thursday, warning again of spreading price pressures.

In its fifth economic bulletin of 2022, the ECB repeated most of President Christine Lagarde’s monetary policy statement from the July 21 press conference, including the determination that ‘further normalisation of interest rates will be appropriate’ and that the Governing Council can now ‘transition to a meeting-by-meeting approach to interest rate decisions.’

Similarly, the ECB stated again that the volume of purchases under the new Transmission Protection Instrument hinged on the extent of the threat to monetary policy transmission, with no ex ante restrictions.

Russia’s war of aggression against Ukraine was continuing to dampen growth, the ECB said, via high inflation, supply constraints and uncertainty. There are ‘tentative signs that some of the supply bottlenecks are easing’, but all in all, negative factors ‘are significantly clouding the outlook for the second half of 2022 and beyond’, it said.

Still, post-pandemic economic reopening, the robustness of the job market and fiscal policy were supporting the economy, it noted. The ECB reiterated its assertion that consumption was being boosted by pandemic-induced savings and the strong labour market.

Inflationary pressures were becoming more broadly based, leading to yet higher measures of core inflation, the ECB said. Inflation would stay ‘undesirably high for some time,’ also due to the weakness of the euro, it said.

‘But looking further ahead, in the absence of new disruptions, energy costs should stabilise and supply bottlenecks should ease, which, together with the ongoing policy normalisation, should support the return of inflation to the Governing Council’s target’, the ECB said again.

The ECB repeated the litany of upside risks to medium-term inflation: a sustained deterioration of the region’s productive capacity, continued expensive energy and food, a dis-anchoring of inflation expectations and second-round inflation effects on wages.

‘However, if demand were to weaken over the medium term, it would lower pressures on prices’, it added.

Indicators of longer-term expectations derived from survey were still rising gradually and were close to or a bit above 2%, whereas those derived from financial markets had weakened significantly after the June monetary policy meeting of the Governing Council, the ECB said.

‘Market-based measures of inflation compensation (based on HICP excluding tobacco) now suggest that inflation may return to levels of around 2% over the course of 2024, rather than in late 2025 as forecast before the meeting’, the ECB said.