European Central Bank policymakers’ meeting in July seemed increasingly worried that soaring inflation was getting rooted, even as the risk of recession threatened the bloc, the accounts of the July 21 meeting showed on Thursday.
The ECB hiked interest rates by 50 basis points to zero in July. That shocked investors after the bank had guided for a smaller move, but the accounts showed policymakers felt price pressures were now huge enough that the ECB had to display its determination to act. The accounts showed:
“Inflationary pressures were judged to have intensified. Persistently high inflation posed an increasing risk of longer-term inflation expectations becoming unanchored.”
At just below 9%, inflation in the euro zone is currently more than four times the ECB’s target and could hit double-digit territory before a slow retreat that will maintain the rate above the ECB’s 2% target through 2004.
“Unanchoring” is a sign that businesses and households are losing confidence in the ECB’s willingness to get price growth back to target and they start changing their own wage-setting behavior, entrapping soaring 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 hike rates by another 50 basis points next month, even as the risk of a recession is mounting, as inflation is currently close to double-digit territory and impeding gas shortages could shoot prices even higher.
Still, policymakers underscored that the big July move, backed by a “very large” majority instead of the frequent unanimity seen in policy decisions, was frontloading and should not be seen as announcing a more hawkish interest rate path.
The accounts stated:
“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 normalization cycle.”
The accounts also signaled that policymakers were clearly aware that the risk of a recession in the euro zone was mounting but felt governments could offer better support.
The ECB concluded:
“Monetary policy was not able to provide effective support when the economy was hit by a series of supply shocks.”
