ECB Minutes Show Some Holdouts Against 50 BPS Rate Hike
2022.08.25 16:05
By Geoffrey Smith
Investing.com — The European Central Bank’s decision to raise its key interest rates by half a percent in July was opposed by some members of its governing council, according to the accounts of the meeting published on Thursday.
The ECB said “a very large majority” of members on the council had supported the move, but noted that some were concerned enough by “looming recession risks” to advocate for a smaller step.
By contrast, the decision to create a new tool to contain unwarranted volatility in sovereign debt markets was supported unanimously.
The two decisions had been seen by analysts at the time as a ‘quid pro quo’, which would satisfy inflation hawks by raising rates faster than the bank had suggested at its June meeting, while also putting a safety net under the bond markets of Italy and other, financially weaker members of the Eurozone.
In addition to the actual rate hike, which ended the ECB’s experiment with negative interest rates, the bank had also flagged that it intended to raise rates again in September. However, it had said its action in September would depend on the economic data, abandoning a policy of ‘forward guidance’ in a desire to maintain maximum flexibility in its decision-making.
The accounts show a continued reluctance at the bank to accept the need for an overall higher trajectory of interest rates to deal with this year’s surge in inflation.
“It was seen as important to stress that the 50 basis point hike did not constitute an upward shift in the interest rate path but rather a frontloading of the policy normalization,” the accounts said.
One likely opponent of the move is board member Fabio Panetta, who told a conference on Wednesday that the ECB shouldn’t need to raise rates much more.
“We may have to adjust our monetary stance further, but …. we have to be fully aware that the probability of a recession is increasing,” Panetta said.
His comments contrast sharply with those of German ECB board member Isabel Schnabel, who said recently that rates are still well away from a level that could be construed as ‘neutral’ for the economy. The ECB’s accounts side with Schnabel, saying that its policy stance remains “accommodative”.
In part, that is because the ECB has repeatedly underestimated inflationary pressure this year – something that was acknowledged in the meeting.
“Once more, June had seen an inflation surprise, confirming the underestimation bias observed in the recent past when outturns were compared with earlier projections,” the ECB said.
That trend has continued since the meeting, with Eurozone inflation hitting a new high of 8.9% in July. That means that real interest rates – adjusted for inflation – are still deeply negative.
The euro, which has fallen to a 20-year low against the dollar amid the ECB’s reluctance to raise rates more aggressively, drifted marginally lower after the accounts’ publication but was still up a touch on the day at $0.9977.
In the past, a cheaper euro has served the Eurozone well, ensuring robust demand from export markets such as the U.S. and China that has offset chronically weak domestic demand. However, the ECB’s accounts suggested a dawning realization that it can’t rely on such factors any more, due to the “deteriorating outlook” in the U.S., U.K. and China.
“The point was made that the improvements in competitiveness and support for growth that would normally be associated with a depreciation were being impeded by the prevailing global supply constraints and logistics restrictions,” the ECB said.
