By David Barwick – FRANKFURT (Econostream) – Another European Central Bank interest rate hike "would likely be necessary unless the inflation outlook improved significantly," an account of the ECB's July meeting showed Thursday, although policymakers stressed that they were not committed in advance to raising rates in September.
All Governing Council members backed keeping the ECB's three key interest rates unchanged at the July 22-23 meeting, with incoming data seen as providing a strong case for pausing after the June increase as uncertainty remained high and the full inflationary impact of the Middle East energy shock had yet to emerge, the account said.
The lower-than-expected June inflation reading, a slight easing in underlying inflation and wage dynamics consistent with the ECB's 2% target all supported a pause, while longer-term inflation expectations remained anchored and there was little evidence of second-round effects, according to the account.
It was also argued that, with ECB staff analysis attributing the increase in inflation so far almost entirely to energy supply developments and virtually none of it to aggregate demand or fiscal policy, another rate increase would not address the underlying cause of the inflation rise.
But - as ECB President Christine Lagarde indicated during the subsequent press conference - some members said they would not have opposed another increase already in July, arguing that incoming information since the June meeting had strengthened the case for further tightening and that there was only a low likelihood of circumstances in which another hike would not be warranted.
Those policymakers pointed to analysis conducted in June showing that rates needed to rise further under all the scenarios contained in the June projections, including the milder scenario, the account reported.
They also argued that rates needed to move into mildly restrictive territory, with current rates seen as not restraining the economy, a view they said was corroborated by a further acceleration in lending growth to firms and households.
Despite those concerns, all members ultimately supported leaving rates unchanged, provided communication emphasized the Governing Council's commitment to setting policy so that inflation stabilizes at 2% over the medium term, according to the account.
Conditions were judged to be "fragile, rather than acute," and policymakers saw value in waiting over the summer for more evidence before considering further action, the account said.
The September meeting would bring new staff projections, a second-quarter GDP estimate and additional inflation, wage and expectations data, helping the Council assess whether higher inflation remained largely a direct consequence of the energy shock or instead reflected a more persistent change in the inflation outlook.
Waiting would also provide more time to assess the shift in energy-price increases toward gas, the persistence of elevated crack spreads and the resilience of the economy, the account reported.
The account said policymakers wanted communication to make clear that the July pause did not mean the tightening cycle had ended.
At the same time, communication should stress that the Council was "not pre-committed to a hike in September," allowing for the possibility of an improvement in the medium-term inflation outlook.
Members judged risks to inflation to remain tilted to the upside, citing possible further energy shocks, seasonally low European gas storage levels, renewed food-price pressures and the risk of indirect and second-round effects.
At the same time, underlying inflation pressures had continued to moderate, wage pressures were contained and easing, and longer-term inflation expectations remained anchored, while second-round effects had yet to become embedded in domestic prices and wages.
Economic activity was also judged more resilient than expected. Policymakers noted that the previous tightening cycle was no longer weighing on the economy, while credit growth had remained resilient and short-term growth prospects had improved somewhat compared with the June projections.
The Council reiterated that future decisions would remain data-dependent and be taken meeting by meeting, with a choice between holding and raising rates based on the inflation outlook and associated risks, underlying inflation and the strength of monetary policy transmission.