European Central Bank rate-setters expressed mounting concern that the weak euro will feed higher inflation, which some feared may not be tamed even in an energy supply crisis, when they met last month to raise interest rates for the first time in more than a decade.
Concerns about soaring inflation seemed to outweigh worries about a weakening growth outlook during the deliberations of the ECB governing council in July, minutes published on Thursday from the meeting revealed.
Policymakers at the meeting raised the deposit rate by a greater than expected half-percentage point to zero and signalled more increases to come.
“Members widely noted that the depreciation of the euro constituted an important change in the external environment and implied greater inflationary pressures for the euro area, in particular through higher costs of energy imports invoiced in US dollars,” said the ECB.
Some policymakers argued it should stick to its earlier plan for a 25 basis-point rate rise in July, rather than the 50-basis point rise it ultimately decided on.
But most of them agreed their decision to launch a new bond-buying programme to tackle unjustified divergence in borrowing costs between eurozone member states enabled them to take a bolder approach.
Rate-setters identified a growing number of upside risks to inflation, which hit a record for the eurozone of 8.9 per cent in July.
As well as the weaker euro, these included “a durable worsening of the production capacity of the euro area economy, persistently high energy and food prices, inflation expectations rising above [the 2 per cent] target and higher than anticipated wage rises”.
“It was argued that even a recession would not necessarily diminish upside risks, especially if it was related to a gas cut-off or another supply shock implying a further increase in inflation,” the ECB said, adding that other council members argued low growth would “itself take care of low inflation”.