ECB minutes confirm hawkishness amid growing concerns about growth

The just-released minutes of the European Central Bank's July meeting illustrate the slightly changed tone; from pure hawkishness to more doubtful.

At the European Central Bank's July meeting, the central bank hiked interest rates by 25 basis points before stopping the autopilot, with President Christine Lagarde stressing that both a pause and a rate hike were possible at the September meeting. The just-released minutes of this July meeting give some background to these decisions. The minutes show an ECB that was still more concerned about inflation not returning to target than an economy falling into recession.

Here are some key phrases from the minutes:

• “Headline inflation on an annualised three-month over three-month basis was about 2% in June, reflecting the strong negative momentum in energy inflation.”
• “It was also noted that the three measures identified by staff as performing best as indicators of medium-term inflation were currently pointing in different directions, with the PCCI declining swiftly, while HICP inflation excluding energy, food, travel-related items, clothing and footwear and the measure of domestic price pressures still pointed to the upside.”
• “However, in view of the still elevated inflation outlook, together with the weaker growth outlook, the concern was also raised that the economy might be entering a phase of stagflation, in contrast to a more benign scenario of a soft landing.”
• “In view of the prevailing uncertainties and the large costs of bringing inflation down once it had become entrenched, it was argued that it was preferable to tighten monetary policy further than to not tighten it enough. Before deciding to stop the tightening cycle, the Governing Council needed clearer signs of whether inflation would converge to target once the effects of recent shocks had faded.”
• “Taken together, the September projections, the evolution of underlying inflation and incoming information on monetary transmission would help the Governing Council update its assessment of the appropriate monetary policy stance.”

The minutes also suggested that as long as the eurozone economy doesn’t slide into a full recession, the ECB could have a higher-than-expected tolerance for growth disappointing and coming in weaker than its own forecast. A remark was made that the ECB’s inflation forecasts had been more reliable recently than the growth forecasts.

The fact that underlying inflation remained high and growth was not weak enough pointed to a subtle hawkishness, even though at least one ECB member seemed to have opposed the 25bp rate hike decision initially.