ECB members said more interest rate rises may be necessary after summer, minutes show

Some euro zone rate-setters believe more interest rate rises will be necessary after the summer amid concerns that inflation was staying “too high for too long”, according to an account of last month’s monetary policy decision.

The minutes of the June meeting of the 25-member governing council, which the European Central Bank disclosed on Thursday, support economists’ expectations that interest rates could need to keep rising to tame persistent inflation.

“It was seen as essential to communicate that monetary policy had still more ground to cover to bring inflation back to target in a timely manner,” the document stated, adding that “interest rates beyond July” could be considered “if necessary”.

The central bank last month increased borrowing costs by 25 basis points to 3.5 per cent, the highest level in 22 years – and signalled that an increase of a similar magnitude was likely at its next meeting on July 27th.

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Recent indicators suggest that the euro zone economy is slowing down while inflationary pressures are easing. However, Isabel Schnabel, an ECB executive board member, said this development was at odds with the expectations of financial markets, where inflation-linked swap forward rates and option prices still pointed to “rising upside risks to inflation”.

Dr Schnabel warned that this could reflect investors’ concerns over “whether the currently priced-in ECB policy rate path was sufficient to rein in inflation in a timely manner”.

At least one member initially favoured a 50 basis point increase in June. Hawks on the governing council argued that the inflation outlook required a “strong signal” from the ECB, and that it had sometimes been too timid in its response to changing price pressures.

However, the majority supported the argument of ECB chief economist Philip Lane that the central bank should follow a “meeting-by-meeting approach” rather than signalling any definite intentions. Prof Lane implicitly warned that the ECB otherwise risked borrowing costs rising too much, arguing that “rates were moving closer to a possible peak level”.

Bank of Italy governor Ignazio Visco said on Thursday in a TV interview that the ECB was “not very far” from the peak of its tightening cycle, adding that rates will have peaked by the end of the year.

Some policymakers seem to be losing faith in the ECB’s own quarterly inflation projections which consistently underestimated upward pressure on prices, the minutes said.

“It was argued that the governing council should focus more on data than on the projections,” the statement said, adding that a higher focus on “observable data” could result in better decisions.

More dovish policymakers argued that higher borrowing costs were already slowing down economic activity “as expected”, saying this effect “thus far [had] been concealed by tailwinds for growth” from pent-up savings and supply-side bottlenecks which are now beginning to fade. – Copyright The Financial Times Limited 2023