By Geoffrey Smith
Investing.com — The European Central Bank’s decision to raise its main interest rate by 0.5% in July was opposed by some members of its Governing Council. Accounts for the meeting were released on Thursday.
The ECB said an “overwhelming majority” of members of its governing body supported the move, but noted that some were worried enough about “imminent recession risks” to advocate for a smaller move.
In contrast, the decision to create a new tool to curb unwarranted volatility in sovereign debt markets received unanimous support.
Analysts at the time saw the two decisions as a “quid pro quo”, with faster rate hikes to meet inflation hawkish than the bank in It was higher recommended at the June meeting, while also creating a safety net under bond markets in Italy and other fiscally weaker euro zone members.
In addition to the actual interest rate hike, ending the ECB’s experiment with negative rates, the bank also indicated its intention to raise rates again in September. However, it had said its September actions would depend on economic data, abandoning a policy of “forward guidance” to maintain maximum flexibility in its decision-making.
Accounts show that banks remain reluctant to accept an overall higher interest rate trajectory to deal with the need for soaring inflation this year.
“It is important to stress that the 50 basis point hike does not constitute an upward shift in the path of interest rates, but an advance in policy normalization,” the account said.
A possible opponent is board member Fabio Panetta, who said at a meeting on Wednesday that the ECB does not need to raise interest rates further.
“We may have to adjust our monetary stance further, but … we have to be fully aware that the probability of a recession is increasing,” Panetta said.
His remarks were in stark contrast to those of German ECB board member Isabel Schnabel, who recently said interest rates were still far from “neutral” levels for the economy. The ECB’s account supported Schnabel, saying its policy stance remained “accommodative.”
Part of the reason is that the ECB has repeatedly underestimated inflationary pressures this year – which was acknowledged at the meeting.
“Inflation surprises again in June, confirming the underestimation bias observed recently when comparing results with earlier forecasts,” the ECB said.
This trend has continued since the meeting, with Eurozone inflation hitting a new high of 8.9% in July. That means real interest rates – adjusted for inflation – are still negative.
The euro has fallen to 20 as the ECB is reluctant to raise interest rates more aggressively against The dollar hit a low for the year, edged lower after the accounts were released, but still edged up to $0 on the day. 9977.
In the past, a cheaper euro has been good for the euro zone, ensuring that strong demand from export markets such as the US and China offset chronically weak domestic demand. However, the ECB’s accounts suggest it can no longer rely on these factors due to the “deteriorating outlook” in the US, UK and China.
“It was pointed out that the increased competitiveness and support for growth typically associated with devaluation is being hampered by current global supply constraints and logistical constraints,” the ECB said.
