ECB accounts show overwhelming inflation worries

FRANKFURT (Reuters) – European Central Bank policymakers meeting last month worried that inflation could get stuck at exceptionally high levels so aggressive policy tightening was needed, even at the cost of weaker growth, the account of their Sept 7-8 meeting showed on Thursday.

The ECB raised rates by a bigger than expected 75 basis points at the meeting and signalled further hikes, fearing that rapid inflation was at risk of getting entrenched, making it even more difficult to break.

While some made the case for a smaller, 50 basis point rate hike, a “very large” number of policymakers backed a bigger increase, the accounts indicate.

“Inflation was far too high and likely to stay above the Governing Council’s target for an extended period,” the ECB said its account.

“The expected weakening in economic activity would not be sufficient to reduce inflation to a significant extent and would not in itself bring projected inflation back to target,” it added.

Since the Sept meeting, inflation accelerated to 10%, a level not seen in some euro zone countries for over 70 years, and policymakers have started to line up behind another 75 basis point increase in the 0.75% deposit rate, a move now largely priced in.

ECB President Christine Lagarde also said the bank would keep on raising rates at least until it hit the so called neutral level, where the bank was neither stimulating not holding back growth.

While there is no universally accepted estimate for the nominal neutral rate, economists and policymakers tend to put it between 1.5% and 2%, suggesting that the ECB could get there by the end of the year.

While inflation keeps rising, economic growth continues to slow and the bloc may already be in recession as a surge in energy costs is holding back consumption and discourages investment.

This in turn is bound to weigh on inflation further out but policymakers insist that even a recession would not be enough to control prices, so rate hikes must go on, no matter what.

The ECB will next meet on Oct 27.

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