The key points
Minutes from the ECB’s September meeting, out on Thursday, suggested the governing council’s appetite for further rate increases had softened following the decision to raise rates by 0.25 percentage points
Many on the governing council acknowledged that higher energy prices from the Iran war had become more persistent, noting the risks from oil, gas and product shortages, particularly diesel, but said that transmission to non-energy sectors had been more benign than expected
The verdict
Having raised rates at the September meeting, appetite for further tightening appeared to be more tempered among ECB policymakers, minutes from the meeting suggested. The July minutes clearly pointed that another increase was likely, while September’s minutes marked a return to a more data-dependent stance.
The reasons for greater caution were clear, while the inflation outlook appeared to have worsened, recent inflation data had been better than expected and there were few signs of second-round inflation effects materialising.
One development since the ECB met is a higher-than-expected reading for inflation in September. We do not, however, think this will prompt another move in October and we think the ECB is happy to maintain the pace of tightening to lean against the risk of broader inflation.
We think another move to 2.75 per cent this year will follow in December if the Iran war situation remains unresolved.
The details
Minutes from the July meeting clearly guided towards another rate increase, stating that “while decisions remained data dependent, another rate hike would likely be necessary unless the inflation outlook improved significantly”.
With that move coming in September, minutes from the meeting suggested the need for further increases had fallen. “Communication should remain neutral, neither suggesting that the current decision was another step in a pre-determined tightening cycle nor that it was the last rate hike,” the September minutes said.
The September minutes also reflected the deterioration in the inflation outlook due to the persistence of the Iran war and higher energy prices, and the “improved economic outlook was also expected to contribute to slightly higher core inflation”, the minutes noted.
This was qualified further, that while the risks of more persistent inflation had risen, “indirect effects had remained contained and second-round effects had not been seen”, the minutes said. And that “wages did not show a material response to the energy shock at this stage. Wage growth was still moderating.”
In addition, it was noted that changes in the market, including increases in bond yields, were already “restraining parts of demand”, and that “financing conditions for both firms and households were also expected to tighten, and this would probably act as a drag on growth”.
We think the ECB remains happy that its response so far has been a “robust decision across a wide range of scenarios” and, given the caution expressed above, will hold off raising rates again until December under the assumption that the Iran war continues and energy prices remain elevated.
