(Bloomberg) -- European Central Bank officials deemed September to be an appropriate point to review their interest-rate stance, though pledged to keep an open mind in light of lingering risks to the inflation outlook, an account of their last policy decision showed.
“The September meeting was widely seen as a good time to re-evaluate the level of monetary-policy restriction,” according to the summary, published Thursday. “That meeting should be approached with an open mind, which also implied that data dependence was not equivalent to being overly focused on specific, single data points.”
Investors are betting that the ECB will lower rates when it meets next month, following up on June’s initial reduction. While readings for inflation and productivity disappointed over the summer, a key measure of wages slowed in the second quarter and consumer-price growth is expected to have moderated this month.
Increasing risks to Europe’s growth outlook have reinforced the case for a reduction in borrowing costs when the ECB meets next month, according to Governing Council member Olli Rehn.
Other key comments from the account:
On Inflation and Wages
- “The persistence in services inflation remained the central element shaping the inflation outlook. A remark was made that the risk of seeing high services inflation for a longer period had not been mitigated by the tepid recovery.”
- “As disinflation in non-energy industrial goods was flattening out and high freight costs and rising protectionism might put upward pressure on goods price inflation in the future, a further decline in core inflation would need to rely on disinflation in services.”
- “At the same time, the continued growth of profits in the services sector, albeit at lower rates, and the strength of services demand suggested a weaker transmission of monetary policy to the part of the economy that was exerting the strongest inflationary pressures.”
- “It mattered both for credibility and because a further delay could entail high costs, with inflation expectations being more fragile than usual owing to inflation having been above target for so long.”
On Interest Rates
- “It was argued that the Governing Council could afford to be patient and wait for more data to confirm that disinflation was indeed on track. A cautious approach would also allow the Governing Council to respond by following a more gradual path of reducing policy rates if inflation was more persistent than currently foreseen.”
- “At the same time, it was underlined that a gradual attenuation of policy restriction was a balancing act, as it was also important not to unduly harm the economy by keeping rates at a restrictive level for too long.”
On September Decision
- “By the time of the September meeting extensive new data would be available, such as the July and August inflation data; national account information on the second quarter, including compensation per employee, profits and productivity; an update on monetary data; and a new set of staff projections.”
On QT
- “Members also agreed with the Executive Board proposal to continue applying flexibility in the partial reinvestment of redemptions falling due in the pandemic emergency purchase program portfolio.”
On Fiscal Policy and the Economy
- “The course of fiscal policy was seen as posing challenges in the coming months. Concerns were expressed that, in a period of political uncertainty and changing governments, there might be less fiscal consolidation than expected thus far.”
- “Moreover, greater saving was seen as a natural reaction to the higher interest rates on deposits offered in the context of past monetary policy tightening. However, the strong increase in savings observed in the first quarter of the year was raising questions about the consumption-based narrative embedded in the projections. Overall, despite all these layers of uncertainty, it was felt that the euro area economy remained on track for a consumption-led recovery, in line with rising real income growth.”
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