Upside risks to the inflation outlook and downside risks to growth dominated October’s ECB Governing Council monetary policy meeting, the official account shows, amid increasing focus on fiscal policy’s contribution to upward price pressure and against a background of continued high levels of uncertainty caused by the war in Ukraine.
A “very large” majority of members favoured raising interest rates by 75, rather than 50bps, with some warning that doing less risked falling short of market expectations, at the same time as a larger increment would bring the presumed neutral rate of interest within sight more quickly. Yet all components of demand, including consumption, investment, services and exports, showed signs of weakening, it was noted.
Concern was also expressed that the cumulative impact of the slowdown, including spillovers from monetary policy tightening globally, could result in a “technical recession” at the world level, exacerbating the slowdown in Europe seen in the third quarter of 2022 and likely to persist into early 2023. However, members disagreed over the extent and relative contribution to inflation dynamics of labour market tightness and developments wage in wage dynamics, fiscal policy, commodities and energy prices, and inflation expectations, though the latter were seen as remaining broadly anchored so long as the ECB’s commitment to controlling inflation remained clear.