FRANKFURT (Reuters) – Divided European Central Bank policymakers opted for raising interest rates at their latest meeting to show resolve in the fight against inflation even though evidence was inconclusive, the account of the gathering showed on Thursday.
The ECB raised its key interest rate to a record high of 4.0% at the Sept 13-14 meeting but signalled that its 10th hike in a 14-month-long effort to bring down inflation was likely to be the last as the economy slowed.
The ECB’s account of the meeting showed the decision was a “close call” given “considerable uncertainty”, with some indicators suggesting a 3.75% deposit rate might have also done the job.
But in the end the proposal to raise interest rates by 25 basis point was supported by “a solid majority” of the 26 members of the Governing Council.
“Erring on the side of pausing the first time the decision was a close call could risk being interpreted as a weakening of the ECB’s determination, especially at a time when headline and core inflation were above 5%,” the ECB said.
Policymakers noted that “model-based simulations, expert surveys and market pricing” suggested a deposit facility rate in the region of 3.75% to 4.00% would bring inflation back to 2% “as long as it was understood as being maintained for a sufficiently long duration”.
Long-term bond yields have risen significantly since that meeting as investors prepared for an era of still large budget deficits and reduced or no buying from central banks — a possible headache for big borrowers like Italy.
Borrowing costs have eased slightly this week on the back of Federal Reserve officials talking down the need for further interest rate increases and nervousness about the Israel-Hamas conflict spreading more widely in the Middle East. [GVD/EUR]
(Reporting By Francesco Canepa; editing by Balazs Koranyi)
