ECB Agrees Gradualism Doesn’t Mean Slow Tightening, Small Steps

The European Central Bank headquarters in Frankfurt, Germany.

(Bloomberg) -- The European Central Bank's self-proclaimed “gradual” approach to raising interest rates needn't mean action will be slow or incremental, according to an account of the Governing Council's last policy meeting.

Officials stressed that any notion gradualism precludes increases beyond 25 basis points must be avoided, partly because doing so would jeopardize other ECB guiding principles like optionality and data-dependence. While most backed plans to hike by a quarter-point in July, several wanted to keep the door open to a bigger step.

“There was agreement that gradualism should not necessarily be interpreted as slow action in small steps,” the account of the June 8-9 meeting showed.

The ECB went on to flag a larger move in September and, with inflation at a record and projected to exceed the 2% target through 2024, committed to a “sustained path” of increases after that.

But before the hikes even begin, doubt is building over how far they can go as economic headwinds to Europe's pandemic rebound strengthen amid a possible Russian energy cutoff this winter.

Risks to the inflation outlook were seen “primarily on the upside,” with some policy makers arguing that the three criteria for rate increases established in their forward guidance had been satisfied for “some time.”

“It was suggested that the implied ‘delay' in raising interest rates should, in principle, be offset by implementing a larger rate hike in July or by indicating more explicitly the possibility of a larger interest-rate move later in the third quarter of 2022,” according to the account.

Half-Point Hike

Officials including Martins Kazaks and Gediminas Simkus have since floated a half-point move this month to euro-zone curb price pressures that reached a record 8.6% in June, though the idea hasn't gained much traction. Meanwhile, there's growing concern over rising sovereign-bond yields and widening spreads in weaker euro-area members.

A point was made at the meeting that a tool to target so-called fragmentation “was not at odds with the need to contain inflation pressures” and could indeed help the Governing Council to accelerate its normalization of monetary policy if the inflation outlook warrants. A call was made to speed up work on such an instrument.

But it wasn't until an emergency meeting six days later that policy makers instructed economists at the ECB and national central banks to design a new bond-buying program. The tool -- to be considered at the July 20-21 meeting -- is currently referred to as the Transmission Protection Mechanism, according to people familiar with the matter.

Many details of the instrument remain unknown -- including how the ECB plans to ensure asset purchases don't upset efforts to remove monetary stimulus, what kind of conditions countries must fulfill and how to make the program legally watertight.

The ECB isn't planning to publish an account of its June 15 ad-hoc meeting where the program was commissioned.

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