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ECB compromised on smaller rate hike with promise to do more, accounts show

Many policymakers wanted a larger interest rate increase at the central bank’s last meeting to set rates

Many policy makers wanted a larger interest rate increase at the central bank’s last meeting to set rates. Photograph: DANIEL ROLAND/AFP via Getty Images

Thu Jun 1 2023 - 15:19

Many European Central Bank policymakers preferred a larger interest rate hike last month but agreed to a 25 basis-point move as long as the bank signalled that further increases were still coming, given stubborn inflation, the accounts of the meeting showed.

The ECB slowed the pace of rate hikes to a quarter of a percentage point in May from half a point points in the previous three meetings and only Austria’s Robert Holzmann held out for a bigger increase, according to sources close to the discussion.

“Most of these members indicated that they could accept the proposed rate increase of 25 basis points,” the ECB said on Thursday. “The ECB’s communication should, however, convey a clear ‘directional bias’ to underline that, on the basis of the present outlook, further interest rate increases would be warranted.”

Such an explicit mention of multiple moves suggests that besides June, an increase in July is also on the cards.

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While the bank has yet to guide on the July meeting, the central bank governors of Germany, Netherlands and Ireland, among others, have all said that July needs to remain in play given persistent price growth, particularly for services, primarily driven by wage costs.

“It was felt that the conditions were not in place to 'declare victory' or to be complacent about the inflation outlook,” the ECB said.

“It was underlined that reducing the size of the rate increment should not be interpreted as signalling that the governing council had opened the door to a pause in its monetary policy tightening cycle,” the ECB added.

Markets currently consider the June increase a done deal and see another move in either July or September, putting the deposit rate at 3.75 per cent by the close of the summer.

Still, policymakers said they preferred a “data-dependent, meeting-by-meeting approach,” so they have the option of changing their outlook.

The meeting took place before euro-zone inflation published on Thursday, which showed price increases slowed more than economists had forecast. So-called core inflation, which strips out volatile goods such as food and energy, also eased somewhat, in a sign that the ECB’s interest rate hikes are feeding through to the wider European economy. – Reuters

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