FRANKFURT, May 28 (Reuters) – The European Central Bank’s decision to keep rates unchanged in April was a close call for some policymakers as persistently high inflation made it increasingly hard to look past the energy-driven price shock, the accounts of the meeting showed.
Inflation jumped to 3% last month and a further increase is likely as the war in Iran is lasting longer than initially expected, making it very likely that the ECB will follow up its earlier warnings with actual policy action next month.
“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,” the ECB said in the accounts of the April 29-30 meeting on Thursday.Â
“The option value of waiting to raise policy rates had decreased since the last meeting, and it had become increasingly unlikely that a ‘looking through’ approach without any monetary policy action would be appropriate,” the ECB said.
The bank, however, decided against the move in April as it has no evidence yet that the energy price shock was seeping into other parts of the economy via second-round effects.
This may still happen, requiring action, so policymakers were also keen to signal to markets that there was no complacency, the bank was ready to act, and June would be in their focus.
“Communication should not give the impression that the Governing Council was inclined to look through the supply shock,” the accounts said. “Members stressed the need to signal vigilance and communicate that upside risks to inflation and downside risks to growth had intensified.”
Policymakers argued that they would have a wealth of new information by the June meeting plus new economic projections, offering greater clarity.
Supporting expectations for a hike, policymakers also said that energy prices were likely to stay high for a longer period and supply disruptions could spread beyond oil to other products.
Another risk was that governments would offer subsidies to consumers against high energy prices, much like they did in 2022, possibly exacerbating the inflation problem, the accounts showed.
Financial markets price in nearly three rate hikes in the 2% deposit rate over the course of the next year, with the first step fully priced in by July and the second by October.
(Reporting by Balazs KoranyiEditing by Francesco Canepa and Toby Chopra)
