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A number of European Central Bank policymakers expressed doubts over cutting interest rates in June because inflation and wages were heading in the opposing direction, according to the official account of last month’s meeting.
After the decision, ECB president Christine Lagarde said only one of the 26 council members, which later turned out to be Austrian central bank governor Robert Holzmann, had opposed a cut.
But the ECB said on Thursday that “some members” of the council had argued “there was a case for keeping interest rates unchanged” given that “wage growth had surprised to the upside and inflation seemed to be stickier, mainly on account of services”.
But it added “a willingness to support [the] proposal was expressed, notwithstanding the reservations put forward”.
The reservations expressed by some council members will add to investors’ expectations that the ECB will leave rates on hold when its council meets in two weeks. Markets are pricing in about two more quarter percentage point rate cuts this year by the Frankfurt-based bank.
The benchmark deposit rate was cut from an all-time high of 4 per cent to 3.75 per cent on June 6. The ECB said this was based on its “increasing confidence in the reliability, solidity and robustness of the projection showing that inflation would return to the 2 per cent target in a timely manner”.
The decision had been well telegraphed for months by policymakers, making it difficult to leave rates unchanged, even though data published before the meeting had made several council members uncomfortable. Monetary policy in the US added to their unease — the Federal Reserve is yet to start cutting rates and is not expected to do so before September.
Eurozone inflation stopped falling in May, driven back up to 2.6 per cent by an acceleration of services prices and a pick-up in wage growth in the first quarter to a record high of close to 5 per cent.
This prompted central bank officials to raise their inflation forecast for this year and next year and to delay by several months their prediction for when it would hit its 2 per cent target to the final quarter of 2025.
The ECB said on Thursday that the wavering council members “viewed risks to the inflation outlook as being tilted to the upside, partly because downside risks had diminished since the last meeting owing to the ongoing economic recovery [and] heightened geopolitical risks”.
The critics argued that “a small undershooting of inflation would be much less costly than a continued overshooting, especially as the anchoring of inflation expectations should not be taken as given”, adding that this suggested a rate cut “was not fully in line with the principle of data-dependence”.
In June, Eurozone inflation slowed again to 2.5 per cent, according to official statistics published this week. Yet Philip Lane, the bank’s chief economist, said on Thursday that he was still concerned about the stickiness of domestic inflation. The comments will add to the impression that the ECB will take a cautious approach to further cuts in borrowing costs.
“What we can mostly influence is domestic inflation,” Lane said in a lecture in Italy. “This goes back to why we still have some concerns. Domestic inflation is lower than at the peak around a year ago, but it’s still about 4 per cent.”
