The accounts of the European Central Bank's July Governing Council meeting — the ECB's minutes-style record of policy deliberations, released several weeks after each gathering — show that policymakers concluded that the risks to the inflation outlook were tilted to the upside, while rallying behind the decision to keep policy rates unchanged.

According to the full accounts, inflation expectations currently remained well anchored for the medium term, but high short-term inflation expectations had continued to persist since the outbreak of the war. Members noted that the longer energy prices stayed high, the more likely they were to drive up broader inflation through indirect and second-round effects — the channel through which higher energy and import costs feed into wages and domestic prices, making inflation harder to bring back down.

Members widely agreed that the incoming information had been broadly consistent with the baseline in the June projections, and they took comfort from the fact that most survey- and market-based inflation expectations had remained well anchored. At the same time, they judged that the inflation outlook remained vulnerable to renewed shocks, and that the risks surrounding the inflation outlook remained to the upside.

On policy, members stressed that the incoming data provided a strong case for a pause in rate hikes at the July meeting, noting there had been little evidence of second-round effects materialising.

Some members, however, noted that incoming data had underlined the case for further policy tightening and said they would not have opposed raising rates at the July meeting. These members stressed the low likelihood of a situation in which a further rate hike would not be warranted, placing stronger emphasis on the upside risks to the inflation outlook and arguing that rates needed to move into mildly restrictive territory — above the level at which policy neither stimulates nor restrains the economy.

Despite these concerns, all members were willing to rally behind the decision to keep policy rates unchanged. It was argued that pre-emptive action could be justified if the situation turned sufficiently acute, but under the current circumstances the most prudent course of action was to move slowly, reflecting the option value of waiting — the benefit of accumulating more evidence before committing to a move that could still be delivered later if inflation pressures intensified.

Members also emphasised the need to communicate that risks to inflation lay to the upside, and that it was important not to suggest that the pause in rate hikes at the current meeting meant the end of the tightening cycle had been reached.

The accounts contained no real surprises, with the language largely reaffirming the angle the ECB has been working in selling a rate hike in September. As a reminder, the ECB is widely expected to raise key interest rates again next month to better position itself in the fight against inflation. The next rate hike would arguably only put monetary policy in mildly restrictive territory, the floor level at which policymakers need to be in preparing for worse developments on the inflation front. With the accounts landing only weeks before that decision, attention now turns to the September meeting and the accompanying quarterly staff projections, which will show whether the upside risks flagged in July have fed into the ECB's own numbers, as well as to incoming data on underlying inflation and wages that will shape how the debate between those favouring patience and those arguing for further tightening plays out.