ECB Minutes: Officials did note that inflation is expected to remain well above the 2% target into the first half of next year, with core inflation projected to stay above 2% for the entire projection horizon despite the policy tightening

Inflation

• All members viewed the risks surrounding inflation outlook as being to the upside relative to staff baseline forecasts.
• Inflation expectations for shorter horizons had moved up, as reflected in surveys of both experts and households.
• With the energy shock proving more persistent than had been envisaged at the time of the March and April meetings, and indirect effects starting to become increasingly visible and broad-based, the inflation outlook had deteriorated further
• Was argued that the shock should be increasingly viewed as being more of an oil shock than a broad-based energy shock involving natural gas, fertilisers and other channels.

Labour

• The labour market remained resilient and continued to support domestic demand.
• While labour demand had cooled further and firms and households expected the labour market to weaken, it was pointed out that there was still more confidence in employment prospects than had been the case before the pandemic.
• Unemployment also remained close to historical lows
• It was argued that this could indicate a further tightening of the labour market. However, there was also a risk that employment would not remain as resilient following this shock as had been the case following the 2022 shock, because firms might be less inclined to hoard labour this time and might instead use the opportunity to substitute AI for labour.

Growth

• Members assessed that the risks to the growth outlook were to the downside
• it was cautioned that the aggregate GDP outlook could be masking weaker domestic demand components, with consumption and investment revised down and only lower imports helping to cushion the effect on headline growth, with the scale of the revision for imports seen as relatively large when compared with the revision for domestic demand
• It was also argued that the euro area economy had become more adaptable to energy shocks, reflecting its reduced dependence on fossil fuels.
• It was also argued that part of the weakness in euro area growth was structural and that this became more visible in challenging times. Over the medium term there was also a risk that the euro area’s structural growth challenges could be compounded if there were a more substantial fragmentation of the world economy.

Policy

• Current adjustment should not be seen as an insurance hike.
• Looking ahead, the Governing Council would continue to carefully monitor the evolving situation and its data-dependent approach would help it to set monetary policy as appropriate to ensure that inflation stabilised sustainably at the medium-term target.