(Reuters) – European Central Bank policymakers saw no urgency to cut interest rates last month but hinted they could be discussed again in September as high rates hurt growth, reports from their July 17-18 meeting showed on Thursday.
The ECB left interest rates unchanged at the meeting and gave virtually no indication of its future monetary policy moves. However, balance sheets reflect concerns that economic growth could be curbed too much and there is growing confidence that it is on track to reduce eurozone inflation to the 2 percent target.
“A gradual easing of monetary policy restrictions was a balancing act, as it was also important not to unduly damage the economy by keeping interest rates at restrictive levels for too long,” the balance sheets say. “It was … important to keep an eye on the real economy.”
“The September meeting was widely seen as a good time to reassess the level of monetary policy constraints,” the ECB added. “This meeting should be approached with an open mind.”
The ECB was one of the first major central banks to cut interest rates in June, and eurozone economic data over the past six weeks largely supported further easing.
The growth of collectively agreed wages, an important indicator for assessing future price pressures, slowed significantly in the second quarter. At the same time, economic growth was weak and Germany, the Union’s largest economy, is on the brink of recession.
For this reason, markets now believe the probability of a 25 basis point rate cut next month is over 90 percent, with at least one more move to follow later this year, possibly in December.
“Although there could still be positive surprises in wage growth later in the year, today’s wage growth forecast makes a 25 basis point cut in September even more likely,” said ING economist Bert Colijn.
The ECB has long been concerned about rapid wage growth, but balance sheets suggest that policymakers are becoming increasingly relaxed.
“It was reassuring to see that domestic cost pressures caused by high wage increases, including in the services sector, were increasingly cushioned by unit profits,” the balance sheets said.
In addition, policymakers believed that inflation was on track to return to its target and was moving along long-established lines, with price growth expected to return to two percent by the end of next year.
