The members of the Governing Council of the European Central Bank (ECB) have decided to adopt more flexible communication on the future path of key interest rates in order to gain room for maneuver in a highly uncertain environment, the minutes of their meeting show on Thursday. July meeting.
Eurozone monetary policymakers have agreed to a transition to a meeting-by-meeting approach to interest rate decisions, the minutes of the July 21 meeting explain.
Since 2013, the ECB has expressed its views after each monetary policy meeting on the future trajectory of its key rates, an exercise referred to as forward guidance.
This advance communication was a powerful instrument when interest rates were close to the lower bound, but its usefulness was deemed to be much less in the current normalization phase, characterized by a tightening of monetary policy to fight against the inflation in a context of economic turbulence.
A new announcement of increase in 15 days
First application of this new approach: while the ECB had communicated for several weeks on its intention to raise its key rates by a quarter of a point in July, it surprised by announcing an increase of half a point . This is the first increase since 2011.
Some members of the Board of Governors have, moreover, during the discussions pleaded in favor of raising key rates by 25 basis points to remain consistent with the intention communicated at the June meeting.
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But, in the current circumstances, characterized by exceptionally high uncertainty, specific guidance on the future path of interest rates was seen as excessively limiting the ECB’s room for manoeuvre, notes the minutes of the meeting. of July 20.
Given this change in strategy, speculation is rife on the level of the next rate hike that the ECB will not fail to announce in 15 days, following its meeting on 8 September. Most analysts are betting on a further half-point rise in the face of inflation that is still near peaks.
The president of the institution Christine Lagarde also underlined the extreme uncertainty of the current projections, in an interview with Madame Figaro magazine: We can no longer rely religiously on the forecasts provided by our models – over the past two years, they have had to constantly being revised upwards. There are elements that the models do not integrate. This is the principle of the unexpected.