Fears of repeating 2011 mistake led to ECB split on latest interest rate rise

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Some European Central Bank policymakers criticised its decision to raise interest rates last month, warning that it risked repeating a 2011 mistake when it raised borrowing costs only to cut them months later after a sovereign debt crisis hit.

The objections from the more “dovish” ECB governing council members were not enough to dissuade a “solid majority” from agreeing to raise rates for a 10th consecutive time, according to the official account of the meeting published on Thursday.

But the decision to increase its benchmark deposit rate by a quarter point to a record high of 4 per cent was “a close call”, with most ECB council members concluding that “the risks of tightening too much and the risks of tightening too little had become more balanced”.

The September decision was the closest call that rate-setters have faced since they began raising borrowing costs during the summer of 2022.

“The point was made that the risks of hiking at the present time, and later having to reverse course should the economy weaken by more than expected, were larger than those of introducing a pause in the tightening cycle and having to increase rates at one of the coming meetings,” the ECB said in the minutes.

The account of the meeting confirms the widely held view that the ECB is unlikely to raise rates further, barring another inflationary shock that delays the expected slowdown in price growth to the central bank’s 2 per cent target in the next couple of years.

Even some of the more “hawkish” ECB council members think borrowing costs are now high enough. Joachim Nagel, head of Germany’s central bank, said this week that inflation was “going in the right direction”, adding that “pausing could be one of the options” when the council meets in Athens on October 26.

At last month’s meeting, a majority of council members argued that a further rate increase would “signal a strong determination” to bring price growth down, especially as inflation remained above 5 per cent, even excluding more volatile energy and food prices.

“Erring on the side of pausing the first time the decision was a close call could risk being interpreted as a weakening of the ECB’s determination, especially at a time when headline and core inflation were above 5 per cent,” the accounts said.

The ECB last month raised its inflation forecast for this year and next, predicting it would only hit 2 per cent in late 2025. Since then, eurozone inflation has fallen faster than expected from 5.2 per cent in August to almost a two-year low of 4.3 per cent in September.

A key concern for the ECB is the risk that high wage growth keeps prices rising rapidly, underlined by this week’s demand for a 10.5 per cent pay rise for 2.5mn regional public sector workers in Germany by the Verdi union.

Despite “tentative signs” that wage growth had peaked, some council members said last month they wanted “further evidence” it was slowing down. Others pointed out that “supply shocks could push inflation further above the target for longer, which could feed into inflation expectations”.