ECB accounts show overwhelming inflation concerns

ECB accounts show overwhelming inflation concerns

Signage is seen outside the European Central Bank (ECB) building, in Frankfurt, Germany, July 21, 2022. REUTERS/Wolfgang Rattay

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Aug 25 (Reuters) – European Central Bank policymakers meeting last month appeared increasingly concerned that high inflation was getting entrenched, even as the risk of a recession loomed in the bloc, the accounts of the July 21 meeting showed on Thursday.

The ECB raised interest rates by 50 basis points to zero last month. That surprised investors after the bank had guided for a smaller move, but the accounts showed policymakers felt price pressures were now big enough that the ECB had to demonstrate its determination to act.

“Inflationary pressures were judged to have intensified,” the accounts showed. “Persistently high inflation posed an increasing risk of longer-term inflation expectations becoming unanchored.”

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At just below 9%, inflation in the euro zone is now more than four times the ECB’s target and could rise into double digit territory before a slow retreat that will keep the rate above the ECB’s 2% target through 2024.

“Unanchoring” is an indication that households and businesses are losing trust in the ECB’s willingness to get price growth back to target and they then start adjusting their own wage-setting behaviour, entrapping high inflation in a wage-price spiral.

“Continued anchoring of inflation expectations was dependent on the Governing Council acting decisively on the worsening inflation outlook,” the accounts said.

The ECB is expected to lift rates by another 50 basis points next month, even as the risk of a recession is rising, as inflation is now nearing double digit territory and looming gas shortages could push prices even higher.

Still, policymakers highlighted that the big July move, supported by a “very large” majority rather than the frequent unanimity seen in policy decisions, was frontloading and should not be seen as heralding a more aggressive interest rate path.

“A decision to raise interest rates by 50 basis points at the present meeting should be regarded as frontloading … rather than indicating a change in the rate to be expected as the end-point of the normalisation cycle,” the accounts showed.

The accounts also indicated that policymakers were keenly aware that the risk of a recession in the euro zone was rising but felt governments could provide better support.

“Monetary policy was not able to provide effective support when the economy was hit by a series of supply shocks,” the ECB said.

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Reporting by Balazs Koranyi; Editing by Susan Fenton

Our Standards: The Thomson Reuters Trust Principles.

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