The European Central Bank's account of its April policy meeting shows that upside risks to inflation and downside risks to growth had both intensified, with policymakers acknowledging the economy had already been weakening, held back by persistent uncertainty.
According to the meeting account, such weakness could persist well beyond the end of the conflict, while the energy price shock and associated supply disruption posed a dilemma for monetary policy.
At the time of the meeting, there was little evidence that the increase in energy prices was generating second-round effects. However, the account noted that the probability of such effects would increase as the duration of the conflict increased. On the consumer side, it was also considered too early for second-round effects to be visible.
Policymakers observed that the current situation of a classical negative supply shock was different from the situation in 2022, and that maintaining price stability might necessitate tighter monetary policy to keep inflation expectations in check.
Members emphasized that they could afford to gather further information before deciding to act. By June, more information on the impact of the energy shock would be available, and there was expected to be more clarity on the duration of the conflict by then.
Notably, a number of members noted that the decision was a close call and that they would not have opposed raising rates at the current meeting had this been on the table. It was also acknowledged that increasing interest rates at the current meeting would have sent an even stronger signal of determination, and that the option value of waiting to raise policy rates had decreased since the last meeting.
Despite these concerns, all members were willing to rally behind the decision to keep policy rates unchanged, as there was no acute urgency for a rate hike at the current meeting — so long as communication stressed a firm commitment to setting monetary policy to ensure that inflation stabilised at the target in the medium term.
The minutes reveal that while there was no broad consensus pushing for an immediate rate hike at the April meeting, the account nonetheless provides meaningful insight into the Governing Council's thinking. With several members indicating they were close to supporting a hike and the option value of waiting having diminished, a rate increase at the following month's meeting appears increasingly likely given the prevailing circumstances.
Why it matters
Several members described the April rate decision as a 'close call,' signaling that the Governing Council was closer to acting than a unanimous hold might suggest.
The account explicitly states that the option value of waiting to raise policy rates had decreased since the last meeting, indicating the bar for inaction was rising.
Policymakers identified the current negative supply shock as structurally different from the 2022 episode, meaning past policy responses may not serve as a reliable guide for what comes next.
The June meeting was flagged as a key decision point, with members expecting more data on the energy shock's impact and greater clarity on the duration of the conflict by then.
