Highlights
Minutes of the September meeting confirm that the Governing Council (GC) was split over additional tightening but also underline a broad-based determination to get inflation sustainably back to target.
Importantly, the minutes noted that market expectations for inflation in the medium and longer term had edged up further. However, the moderation in the core rate seen in August was thought to be in line with a continued softening in the underlying trend and this, combined with weakening domestic economic activity, had left monetary policy rate expectations little changed from July. Nonetheless, inflation in services remained persistently high and wage pressures elevated in what was still a tight labour market. Indeed, overall inflation was still expected to be too high for too long, with the headline rate for 2023 and 2024 in the September staff projections being revised upwards from the June forecasts.
Consequently, in view of the ongoing uncertainty surrounding model-based simulations, expert surveys and market indicators, the choice between holding the deposit facility rate at 3.75 percent and moving to 4.0 percent was finely balanced. While far from unanimous, ultimately most GC members thought an additional hike would reinforce progress towards the target for two basic reasons. Firstly, if the economy evolved in line with the staff baseline case, a hike would bolster confidence that inflation would return to target within the projection horizon. Secondly, a higher interest rate would more strongly limit the amplification of any upside shocks to the inflation path. In consequence, a more secure pace of disinflation and greater insurance against upside risks would also reinforce the anchoring of inflation expectations, which remained a precondition for the disinflation process to keep up its pace.
Importantly, the minutes noted that market expectations for inflation in the medium and longer term had edged up further. However, the moderation in the core rate seen in August was thought to be in line with a continued softening in the underlying trend and this, combined with weakening domestic economic activity, had left monetary policy rate expectations little changed from July. Nonetheless, inflation in services remained persistently high and wage pressures elevated in what was still a tight labour market. Indeed, overall inflation was still expected to be too high for too long, with the headline rate for 2023 and 2024 in the September staff projections being revised upwards from the June forecasts.
Consequently, in view of the ongoing uncertainty surrounding model-based simulations, expert surveys and market indicators, the choice between holding the deposit facility rate at 3.75 percent and moving to 4.0 percent was finely balanced. While far from unanimous, ultimately most GC members thought an additional hike would reinforce progress towards the target for two basic reasons. Firstly, if the economy evolved in line with the staff baseline case, a hike would bolster confidence that inflation would return to target within the projection horizon. Secondly, a higher interest rate would more strongly limit the amplification of any upside shocks to the inflation path. In consequence, a more secure pace of disinflation and greater insurance against upside risks would also reinforce the anchoring of inflation expectations, which remained a precondition for the disinflation process to keep up its pace.
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.
