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.