Highlights
Minutes of the May meeting show that earlier worries about the stability of the global banking system had been largely replaced by a renewed focus on inflation. To this end, different measures of the underlying rate were offering different signals but, in general, core inflation was still seen as too high and sticky.
Consequently, a number of members favoured raising key interest rates by 50 basis points, particularly with inflation projected to be above target over at least four years and the elevated risk of a de-anchoring of inflation expectations. These members saw the risk of tightening rates too much as being less than the risk of tightening them too little.
However, others thought a 25 basis point move would be more prudent, with the possible costs of a larger rise outweighing the benefits, given still elevated uncertainty and the perception that the transmission of much of the impact of previous rate increases was still pending. In addition, the point was made that the smaller increment would allow the Governing Council to keep raising rates for longer should underlying inflation pressures persist.
In the end, most members indicated that they could accept the 25 basis point increase proposed by Chief Economist Philip Lane. That said, it was agreed that the ECB's communication should convey a clear"directional bias" to underline that, on the basis of the present outlook, further interest rate increases would be warranted in order to return inflation to target and to avoid a smaller rate increase being misinterpreted as signalling the prospect of a pause in the current hiking cycle.
Consequently, a number of members favoured raising key interest rates by 50 basis points, particularly with inflation projected to be above target over at least four years and the elevated risk of a de-anchoring of inflation expectations. These members saw the risk of tightening rates too much as being less than the risk of tightening them too little.
However, others thought a 25 basis point move would be more prudent, with the possible costs of a larger rise outweighing the benefits, given still elevated uncertainty and the perception that the transmission of much of the impact of previous rate increases was still pending. In addition, the point was made that the smaller increment would allow the Governing Council to keep raising rates for longer should underlying inflation pressures persist.
In the end, most members indicated that they could accept the 25 basis point increase proposed by Chief Economist Philip Lane. That said, it was agreed that the ECB's communication should convey a clear"directional bias" to underline that, on the basis of the present outlook, further interest rate increases would be warranted in order to return inflation to target and to avoid a smaller rate increase being misinterpreted as signalling the prospect of a pause in the current hiking cycle.
Definition
The European Central Bank (ECB) meets about every six weeks to determine the appropriate stance of monetary policy. The precise details of the policy deliberations are kept secret for thirty years but, since the 22nd January 2015 meeting, summary version of the minutes have been made available around four weeks after the discussions have taken place.
Description
The minutes provide a key insight into what the ECB is focusing upon when setting policy. As such they potentially can have a sizeable impact upon investor sentiment; especially at times when speculation is rife about a possible near-term change in official interest rates and/or non-conventional monetary policy instruments.
