Frankfurt — Europe’s most consequential interest-rate question is narrowing to a date. The accounts of the European Central Bank’s July meeting, published this week, describe officials who left rates unchanged while a visible bloc pressed for a hike, and a discussion that, combined with everything since, builds a path toward a September increase. President Christine Lagarde flagged the split herself last month; the minutes now show its depth.
What The Minutes Admit
The through-line is a bank slowly talking itself into confidence. The accounts open with an outlook still “surrounded by high uncertainty” — yet the same passage concedes that incoming data had beaten forecasts and “downside risks to growth were judged to have become less pronounced” as confidence indicators kept recovering. On prices, the Governing Council saw “reassuring elements and reasons for continued vigilance and caution” in the numbers since June, and concluded that “the risks to inflation remained to the upside.” One flagged danger is gas: the accounts recall why 2022 hurt so badly, citing “the role of gas as the marginal factor for electricity production at that time.” A mechanism that amplified the last shock could amplify the next one.
Beneath the headline, the case for calm held up. Wage growth has been moderating, profit margins have stayed stable, and the travel sector offered a live lesson in price resistance: airlines that tried to lift fares met weaker demand. The bottom line in the accounts is that “second-round effects of energy price shocks had not yet become embedded in domestic price and wage dynamics.” On expectations, the verdict was flat: “Inflation expectations were assessed as anchored over longer horizons.”
None of that satisfied the wing pushing for action. Several members said the data since June had strengthened the case for tighter policy and “they would not have opposed raising rates at the current meeting”. They stressed “the low likelihood of a situation in which a further rate hike would not be warranted” and pointed to evidence that “acting earlier could at times be less costly and lowered the risk of falling behind the curve.” The majority still chose patience, weighing a fragile, though not acute, situation against the summer’s information flow and settling on “the option value of waiting”.
Why September, And What Comes After
The council sits again later this month, and nearly everything since July has pushed one way. The eurozone has absorbed the war in the Middle East with almost unexpected resilience, helped by good fortune, by fiscal stimulus announced long ago, and by the shutdown of the Strait of Hormuz, which hurt Asian competitors more and pushed orders toward their European rivals. Headline inflation keeps edging higher, oil prices remain elevated, and the odds of a fresh gas shock are widening. Comments that Executive Board member Isabel Schnabel gave to Bloomberg recently lean the same way.
Even the vocabulary is telling. The ECB dislikes the term “insurance rate hike”, but a second increase this year would function as exactly that: a move to shore up the bank’s credibility and head off any indirect effects, or a wage-price pass-through, flowing from the energy shock.
The harder question is what follows September. As the ING team behind the review reads it, one more increase would leave the deposit rate within the range the bank itself calls neutral; going further means deciding that restrictive policy is genuinely necessary. That is a big leap for an economy that has bent without breaking, and a tougher sell with public finances strained and bond yields surging. Risking a recession to tackle a shock that is still, at heart, supply-side in nature is a trade few in Frankfurt seem willing to make.
What the accounts ultimately reveal is an institution whose debate over its precise reaction function has moved behind closed doors, and where the camp favoring one more pre-emptive move keeps growing. September looks like the venue. The real argument is about everything that comes after.
