Excerpts from the Account of the monetary policy meeting of the Governing Council of the European Central Bank, held in Frankfurt am Main on Wednesday and Thursday, 25-26 July 2018:
Turning to euro area activity, members concurred with the view that the easing in quarterly real GDP growth in the first quarter of 2018, to 0.4%, had by and large reflected a pull-back from the very high levels of growth recorded in 2017, with activity still exceeding the rate of growth of potential output. While the most recent data entailed the prospect of real GDP growth in the second quarter of 2018 being somewhat lower than embedded in the June Eurosystem staff projections, the expectation was still that this would be largely temporary and that the outlook over the medium term continued to be consistent with solid and broad-based economic growth.
Looking at the main demand components, support for the medium-term growth outlook continued to come from strong consumption fundamentals, notably ongoing employment growth. Reference was also made to the probable boost provided by expansionary fiscal measures in some countries. Business investment was expected to continue to benefit from favourable financing conditions, rising corporate profitability and solid demand. By contrast, the momentum in export demand had eased after performing exceptionally well during 2017, explaining the pull-back observed in overall economic growth.
Overall, members considered that the risks surrounding the euro area growth outlook could still be assessed as broadly balanced, notwithstanding the uncertainties related to global factors, notably the threat of protectionism. The risk of persistent heightened financial market volatility also continued to warrant monitoring.
With regard to price developments, there was broad agreement with the assessment presented by Mr Praet in his introduction. Euro area annual HICP inflation had increased to 2.0% in June 2018, from 1.9% in May, reflecting mainly higher energy and food price inflation. Looking ahead, on the basis of current futures prices for oil, annual rates of headline inflation were likely to hover around the current level for the remainder of the year. Moreover, while measures of underlying inflation remained generally muted, they had been increasing from earlier lows. According to the June Eurosystem staff projections, underlying inflation was expected to pick up towards the end of the year and to increase gradually thereafter. Patience was hence required, given the uncertainties in the baseline inflation outlook. With respect to domestic cost pressures, increasing support for the inflation outlook was seen to come from the ongoing strengthening in wage growth, although it remained to be seen to what extent wage inflation would translate into price inflation over time.
Members broadly shared the view that uncertainties surrounding the inflation outlook had been receding. Developments since the previous monetary policy meeting had confirmed confidence in the continued convergence of inflation to levels below, but close to, 2% over the medium term, although expectations in the SPF for HICP inflation excluding energy and food in 2020 remained below those in the June Eurosystem staff projections.