By David Barwick – FRANKFURT (Econostream) – European Central Bank policymakers said at their September meeting that higher long-term interest rates could materially restrain growth and inflation and might have implications for the appropriate level of policy rates, according to the account of the meeting published Thursday.
The Governing Council unanimously raised rates by 25bp at its September 9-10 meeting, but stressed that the move should neither be presented as another step in a predetermined tightening cycle nor as necessarily the final increase.
The account said the repricing at the long end of the yield curve, “provided it remained orderly,” supported the intended monetary policy stance and “could have implications for appropriate policy rates in the future.”
Model estimates suggested that the effects of higher long-term rates on growth and inflation could be material, the account said.
Policymakers also noted that a further rise in long-term rates could hurt economic growth, while spillovers in global bond markets could tighten credit conditions and reduce demand.
At the time of the meeting, however, euro area sovereign bond markets were described as orderly, with spreads broadly stable and no broader reassessment of sovereign credit risk evident.
All Governing Council members supported the 25bp hike, judging that the energy shock had become more persistent, inflation would remain above target for longer and risks to the inflation outlook were tilted upward.
The decision was considered robust under all three alternative scenarios prepared by ECB staff, while a deposit rate of 2.50% was still seen as lying within the range of staff estimates of the neutral rate.
At the same time, the account showed substantial emphasis on evidence that the energy shock had not yet spread widely through the economy.
Indirect effects had remained contained and second-round effects had not been observed, while core inflation had edged lower, wage growth was moderating and longer-term inflation expectations remained anchored around 2%.
The account said there had been “no significant broadening of inflation” following the energy shock, while the pass-through of higher energy prices to non-energy components had so far been more benign than expected.
Policymakers nevertheless warned that the longer energy prices remained elevated, the greater the risk that indirect and second-round effects would emerge.
Some members also saw a meaningful possibility that the Middle East conflict could be resolved in the autumn, which would make a milder inflation scenario more plausible.
The account said it was particularly important, given the high uncertainty, to avoid providing guidance on the future rate path and to retain “full discretion” at every meeting.
Communication should therefore remain neutral, “neither suggesting that the current decision was another step in a predetermined tightening cycle nor that it was the last rate hike,” the account said.