FRANKFURT (Reuters) – European Central Bank policy makers are increasingly concerned at their September 7-8 meeting that high inflation may take hold, making tough policy tightening necessary even at the cost of weak growth, meeting accounts showed.
The European Central Bank raised interest rates by 75 basis points at the meeting – more than expected – and further indicated that rapid inflation, once evident only in high energy prices, was now expanding to affect everything from services to durable goods.
While some policymakers made the case for a 50 basis point rate hike, a “too large” number supported a larger increase and in the end all 25 rate-setters settled on the decision, calculations published Thursday indicate.
“Inflation started self-reinforcing to the point that even the perceived marked weakening of growth was not enough to bring inflation back to target,” the calculations said. “Inflation has been very high and is likely to remain above the board’s target for a long time.”
Policymakers concluded that a recession is becoming “increasingly likely” but risks remain tilted towards higher inflation outcomes than expected.
“The expected weakness in economic activity will not be sufficient to reduce inflation significantly and will not, in and of itself, bring expected inflation back to the target,” the calculations said.
Policy makers remained relatively comfortable about the long-term outlook, however, noting that they remained firm near the bank’s 2% inflation target and that rapid wage growth, a prerequisite for permanent inflation, remained largely absent.
Eurozone inflation accelerated to 10% last month, data released after the meeting showed, a level not seen in some member states for more than 70 years. Policy makers are already starting to line up behind another 75 basis point increase in the deposit rate to 0.75% at the October meeting of the European Central Bank, a move that is now largely priced in.
Christine Lagarde, president of the European Central Bank, said that the bank will continue to raise interest rates at least until it reaches the so-called neutral level, where the bank is neither stimulating nor curbing growth.
While there is no universally accepted estimate of the nominal neutral rate, economists and policy makers tend to put it between 1.5% and 2%, suggesting the ECB could get there by the end of the year.
While inflation continues to rise, economic growth continues to slow and the 19-nation currency bloc may already be in the doldrums as rising energy costs curb consumption and discourage investment.
This, in turn, will affect inflation further, but policymakers insist that even a recession will not be enough to control prices, so interest rate hikes must continue, regardless of the cause.
The European Central Bank will meet on October 27.