European Central Bank rate setters have expressed concern about the potential for “self-reinforcing” inflation, with government fiscal measures and the weakness of the euro threatening to push prices up in the coming years.
Monetary policymakers, now dealing with record high inflation of 10 percent, warned that the nature of the price-setting process was changing, with price growth becoming “self-reinforcing” to the point that even an expected slowdown in growth was not enough to bring inflation back to target”.
The comments came in the minutes of the ECB’s monetary policy meeting in September, when the benchmark deposit rate was raised by 75 basis points, a record margin for the central bank, to 0.75 percent.
The statements, released Thursday, bolster expectations of significant rate hikes in the coming months, despite concerns that the region’s economy is headed for recession.
The eurozone’s growth prospects have been hit hard by the Russian invasion of Ukraine, while the region’s energy crisis also pushed inflation up.
Rate-setters emphasized the priority given to bring price pressures closer to their 2 percent target, stating that “growth concerns . . . do not stand in the way of a necessary strong hike in interest rates.” They also argued that acting “vigorously” now could avoid the need to raise interest rates more sharply later in the economic cycle, when the economy is slowing.
“[The account] green light for further major increases,” said Ken Wattret, head of European analysis and insights at S&P Global Market Intelligence.
Markets estimate a 66 percent chance of a 75 basis point gain at its next meeting on Oct. 27. There is a 34 percent chance of a full percentage point increase.
The minutes warned that a number of indicators pointed to an increased risk that inflation would remain high in the long term.
“The longer high inflation persisted, the greater the risk of inflation expectations loosening and the more expensive it would be to get them back on target,” the minutes said.
Since the policy announcement on September 8, inflation in the eurozone has turned out higher than expected.
Despite the sharp rate hikes over the summer, ECB members said key policy rates remain “significantly below neutral”, with neither stimulating nor constraining activity.
Andrew Kenningham, chief economist for Europe at Capital Economics, has now seen deposit rates rise to 2.5 percent by the end of this year and peak at 3 percent early next year.
The weakness of the euro, which has fallen to a decades-long low against the dollar in recent weeks, has also been a concern for the central bank. “Without a timely reduction in monetary policy accommodation, inflationary pressures from a depreciation of the euro could increase further,” the minutes said.
The government’s response to the energy crisis posed “an upside risk to inflation”, according to the ECB. MEPs agreed that measures to tackle energy prices should not be too broad, but should instead be “temporary and targeting the most vulnerable households and businesses to mitigate the risk of inflationary pressures”.
Overall, inflation risks remained “upwards” throughout the projection horizon, the minutes said.