Highlights
Minutes of the July meeting show the Governing Council (GC) acknowledging a deterioration in Eurozone domestic demand but also noting inflation was still too high and underlying measures falling too slowly. All members supported the 25 basis point rate increase in key rates.
In terms of the real economy, there was broad agreement that signs of a possible downside surprise in economic activity versus the June projections were noteworthy. However, it was cautioned that the link between soft indicators and hard data had weakened and GDP had become more prone to revision. As such, the central bank's updated September forecast would be particularly important. On the one hand, it was argued that the deterioration in the outlook showed that monetary transmission was working and that the interest rate increases were doing their intended job. On the other hand, it was recalled that typical transmission lags and ECB staff estimates suggested that the impact on GDP of most of the past tightening was still in the pipeline and would only materialise over the coming year.
There was much discussion about the surprisingly marked divergence in the performances of the weak manufacturing and still relatively robust service sectors. That said, it was recalled that the gap was in line with historical patterns whereby monetary policy affected services with a longer lag. The labour market was seen as strong and somewhat puzzling given that the response to policy changes was unusually muted compared with previous episodes of weakening growth. To this end, anecdotal information suggested that in some countries workers' claims in wage negotiations were becoming more oriented towards recent actual inflation, rather than being forward-looking and anchored by the prospect of inflation coming back to the 2 percent target.
Still, members underlined that there had been no material surprise in the latest inflation outcomes compared with the June projections. It was emphasised that the continued increases in market-based inflation compensation measures were mainly due to risk premia. Even so, the inflation outlook remained highly uncertain and was subject to both upside and downside risks. Crucially though, policy makers argued that it was preferable to tighten monetary policy further than to not tighten enough.
In terms of the real economy, there was broad agreement that signs of a possible downside surprise in economic activity versus the June projections were noteworthy. However, it was cautioned that the link between soft indicators and hard data had weakened and GDP had become more prone to revision. As such, the central bank's updated September forecast would be particularly important. On the one hand, it was argued that the deterioration in the outlook showed that monetary transmission was working and that the interest rate increases were doing their intended job. On the other hand, it was recalled that typical transmission lags and ECB staff estimates suggested that the impact on GDP of most of the past tightening was still in the pipeline and would only materialise over the coming year.
There was much discussion about the surprisingly marked divergence in the performances of the weak manufacturing and still relatively robust service sectors. That said, it was recalled that the gap was in line with historical patterns whereby monetary policy affected services with a longer lag. The labour market was seen as strong and somewhat puzzling given that the response to policy changes was unusually muted compared with previous episodes of weakening growth. To this end, anecdotal information suggested that in some countries workers' claims in wage negotiations were becoming more oriented towards recent actual inflation, rather than being forward-looking and anchored by the prospect of inflation coming back to the 2 percent target.
Still, members underlined that there had been no material surprise in the latest inflation outcomes compared with the June projections. It was emphasised that the continued increases in market-based inflation compensation measures were mainly due to risk premia. Even so, the inflation outlook remained highly uncertain and was subject to both upside and downside risks. Crucially though, policy makers argued that it was preferable to tighten monetary policy further than to not tighten enough.
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.
