Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 13-14 September 2023

1. Review of financial, economic and monetary developments and policy options

Financial market developments

Ms Schnabel noted that, since the Governing Council’s previous monetary policy meeting on 26-27 July 2023, investors’ growth outlook for the euro area and for the United States had continued to diverge, widening the gap in both nominal and real yields between the two economies and driving the euro lower against the dollar. Despite the expected deceleration in the euro area’s growth momentum, market expectations for inflation in the medium and longer term had edged up further. Torn between the perception of a weakening euro area economy and stubborn inflation, expectations for the peak deposit facility rate and the shape of the forward rate curve had remained broadly unchanged. 

Long-term sovereign yields had risen across major advanced economies, but the increase had been more muted in economies where there had been negative macroeconomic surprises, such as in the euro area. Regarding the impact of these developments on exchange rate markets, the euro had depreciated markedly against the US dollar but only slightly in nominal effective terms, on account of the widespread weakness of other currencies. 

A decomposition of nominal one-year yields in the euro area and the United States into real rates and the inflation component showed that the difference in the macroeconomic outlook had been reflected in a stark divergence of real rates across the two economies. Investors priced future one-year euro area real rates lower over the next four years, while the strength of the US economy had pushed investor expectations of future one-year US real rates significantly higher. At the same time, despite the weakening cyclical outlook, euro investors had increased the inflation compensation they demanded over the near and medium-term horizons.