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22.08.2024

ECB monetary policy meeting accounts: September meeting was widely seen as good time to re-evaluate level of monetary policy restriction

European Central Bank released account of its July 17-18 monetary policy meeting, at which its policymakers decided to leave the three key interest rates unchanged after an initial 25-basis-point rate cut at the central bank’s June meeting. It said that:

- Members widely noted that medium-term outlook for euro area economy had not changed overall compared to June meeting;

- It was argued that short-term outlook had become somewhat more “stagflationary’ but contended that weaker activity was likely to dampen inflation over time;

- Members acknowledged that short-term outlook for growth had deteriorated;

- Concerns were expressed that muted activity might not only be of a temporary or cyclical nature;

- It was stressed that economy remained lopsided, as recovery continued to be driven, in essence, by activity in services;

- Members widely pointed to continued tightness in the labour market, which had persisted despite immigration and rising labour force participation;

- 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;

- Members assessed that the risks to economic growth were tilted to the downside;

- Members considered that short-term inflation outlook had remained broadly in line with June projections;

- Persistence in services inflation remained central element shaping inflation outlook;

- Members agreed that triangular relationship between wages, productivity and profits remained central to assessing domestic price pressures;

- Q2 data would be important inputs for the Governing Council’s policy meeting in September;

- Concerns were expressed that wages might continue to grow more strongly than would be consistent with the inflation target;

- Members assessed that inflation could turn out higher than anticipated if wages or profits increased by more than expected;

- Inflation might surprise on downside if monetary policy dampened demand more than expected, or if economic environment in rest of the world worsened unexpectedly;

- Members generally agreed that monetary policy transmission was unfolding according to expectations;

- Extensive new data would be available by the time of September meeting;

- It was argued that Governing Council could afford to be patient and wait for more data to confirm that disinflation was indeed on track;

- Importance of bringing inflation down sustainably to target in a timely manner was reiterated;

- It was underlined that 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;

- It was seen as important to maintain data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction;

- September meeting was widely seen as good time to re-evaluate level of monetary policy restriction. That meeting should be approached with an open mind.

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