(Bloomberg) — Some European Central Bank officials wanted an initial increase in interest rates of half the 50 basis points that was eventually decided on, according to an account of the last policy meeting in July.
The summary, released Thursday — two weeks before policy makers next gather in Frankfurt to set borrowing costs — said, however, that there was unanimous agreement on a new tool to stave off market jitters as borrowing costs rise.
Despite a weakening in the 19-nation euro zone’s economy, money markets are betting the ECB will follow last month’s hike with 100 basis points more of increases at its next two meetings to counter record inflation.
Here’s what ECB policy makers said in July:
- On interest rates:
- “A very large number of members agreed that it was appropriate to raise the ECB’s key interest rates by 50 basis points as proposed by Mr Lane. A 50 basis point hike was seen as warranted in view of the worsening of the inflation outlook since the Governing Council’s June meeting”
- “The Governing Council thereby took a larger first step on its policy rate normalization path than signaled at its previous meeting, applying the stated principles of data-dependence and optionality. This was seen as providing a clear signal of its determination to act and to fulfill its mandate”
- “Some members argued in favor of raising the ECB key interest rates by 25 basis points as this was the intended move communicated at the Governing Council’s June meeting and would preserve consistency with the Governing Council’s earlier communication. With recession risks looming, an increase of 25 basis points was seen as more in line with a gradual monetary policy normalization”
- On the euro:
- “Members widely noted that the depreciation of the euro constituted an important change in the external environment and implied greater inflationary pressures for the euro area, in particular through higher costs of energy imports invoiced in US dollars”
- “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”
- On bond-market stress:
- “Fragmentation risks were considered to be more likely in the current environment, in which monetary policy was being normalized at a time of large supply-side shocks and increasing risks to economic growth”
- “While the ECB was taking action to preserve the efficiency of monetary policy, it was suggested that European governments should, within their own domain of responsibility, advance institutional reforms in order to better address the underlying sources of fragmentation in the euro area”
- “It was recalled that more persistent and fundamental problems were to be addressed by the OMT program and that, while monetary policy was able to react to self-fulfilling liquidity crises, solvency problems had to be tackled by other actors”
- “Members agreed that flexibility in reinvestments of redemptions coming due in the PEPP portfolio remained the first line of defense”
- On forward guidance:
- “While providing forward guidance on interest rates was a powerful instrument in times when interest rates were close to the effective lower bound, its usefulness was judged as being significantly diminished in the normalization phase”
- “In the current circumstances with exceptionally high uncertainty, specific forward guidance on the future interest rate path was seen as excessively constraining the Governing Council’s optionality, flexibility and data-dependence, with the risk that the Governing Council would tie itself to decisions that it needed to reverse later when circumstances changed”
- In this context, attention was drawn to the continued forward guidance on the evolution of the Eurosystem balance sheet”
(Updates with more comments from ECB account.)