The ECB’s “gradualism” does not mean that interest rate movements will be small or slow

The European Central Bank’s (ECB) self-proclaimed “gradual” approach to raising interest rates need not mean that action is slow or incremental, according to a report from the ECB’s Governing Council’s last monetary policy meeting.

Officials stressed that any notion of incremental hikes going beyond 25 basis points must be avoided, in part because it would jeopardize other ECB guiding principles such as optionality and data dependency.

While most supported plans to climb a quarter point in July, some wanted to keep the door open for a bigger move.

“There was agreement that gradualism should not necessarily be interpreted as slow action in small steps,” says the summary of the meeting of 8/9. June.

The ECB announced a bigger move in September, committing to a “sustained path” of hikes thereafter amid record-high inflation, which is expected to exceed the 2% target by 2024.

But before the hikes even begin, doubts are building about how far they can go as economic headwinds for Europe’s pandemic recovery intensify amid a possible Russian power shutdown this winter.

Both the Federal Reserve and the Bank of England have moved much faster than the ECB.

Risks to the inflation outlook were seen “mainly on the upside”, with some policymakers arguing that the three criteria for rate hikes set out in their forward guidance had been met “for some time”.

“It has been suggested that the implied ‘lag’ in raising interest rates should, in principle, be offset by a larger rate hike in July, or by a more explicit hint at the possibility of a larger rate hike later in the third quarter of 2022,” according to the account.

Officials like Martins Kazaks and Gediminas Simkus have since moved half a point this month to stem euro-zone price pressures, which hit a record 8.6 percent in June, although the idea hasn’t garnered much support.

Meanwhile, concerns are growing over rising government bond yields and widening spreads in weaker eurozone members.

The meeting noted that a tool to combat so-called fragmentation “does not conflict with the need to contain inflationary pressures” and could actually help the Governing Council accelerate its monetary policy normalization if the inflation outlook warrants it.

There have been calls to speed up work on such an instrument.

But it was not until six days later, at an emergency meeting, that politicians instructed economists from the ECB and the national central banks to work out a new bond-buying program.

The tool, to be discussed at the July 20-21 meeting, is currently referred to as the Transmission Protection Mechanism, according to people familiar with the matter.

Many details of the tool are still unknown – including how the ECB plans to ensure that asset purchases do not derail efforts to remove monetary stimulus, what kind of conditions countries will have to meet, and how the program can be made legally watertight.

The ECB does not plan to publish a report of its June 15 ad hoc meeting at which the program was commissioned. The ECB’s “gradualism” does not mean that interest rate movements will be small or slow

Fry Electronics Team

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