European Central Bank policymakers were mostly confident that inflation would continue to fall but some felt uneasy about cutting interest rates last month given a slew of negative surprises, the accounts of their meeting showed on Thursday.
The ECB cut rates on June 6 after de facto promising a move but said that the timing of any subsequent cut was up in the air until it was more confident that price growth would move towards its target next year.
Policymakers have made clear in recent weeks that no change is coming at the ECB's July 18 meeting given stubbornly high services costs, but September remains a possibility.
"Some members felt that the data available since the last meeting had not increased their confidence that inflation would converge to the 2% target by 2025," the accounts said. "(This) suggested that cutting interest rates was not fully in line with the principle of data-dependence, and that there was a case for keeping interest rates unchanged at the current meeting."
Nevertheless all but Austria's Robert Holzmann eventually agreed with the rate cut.
Still, some argued that wage growth had surprised to the upside and inflation seemed to be stickier than predicted, so risks were skewed toward higher inflation readings than projected.
"This pointed to greater stickiness ahead, which could increase price pressures for some time, even if wages themselves were a lagging indicator," they said.
"Therefore, any further delay in bringing inflation back to target could make it more difficult to continue to anchor inflation expectations in the future," some members agreed. "All of this suggested that the last mile, as the final phase of disinflation, was the most difficult."
The ECB said that "most members" expressed continued or increased confidence that inflation was on track to fall back to the 2% target the end of 2025.
Investors now see about 43 basis points of rate cuts over the rest of this year and about 110 basis points of moves - or between four and five cuts - by the end of 2025. That would put the 3.75% deposit rate near the 2.0% to 2.5% range considered by many to be a "neutral" policy stance.
The key worry is that inflation remains too choppy for the ECB to be sure it will fall to 2% by late 2025, as projected. Wage growth is still high and labour market shortages are exacerbating fears of persistent income pressures.
That could perpetuate domestic inflation and pin overall price growth above the ECB's 2% target.
