ECB policymakers signal June rate hike as inflation pressure mounts

A number of European Central Bank officials considered an interest rate increase as early as April, according to accounts from the bank’s latest meeting. While policymakers ultimately opted to hold rates steady, the internal debate reveals a growing consensus that the era of looking past energy-driven price shocks is nearing its end.

The decision to maintain current rates was a narrow one, with several members noting they would not have opposed a hike had it been formally proposed. The governing council concluded that the value of waiting had diminished, signaling that a passive approach is no longer sustainable as inflation climbed to 3% last month. While the bank stopped short of action in April due to a lack of evidence regarding second-round economic effects, the minutes underscore an urgent need to signal vigilance to the markets.

Policymakers are now focused on the June meeting, which will provide updated economic projections and a clearer picture of supply-side disruptions. Concerns are mounting that high energy costs will persist longer than initially anticipated, potentially exacerbated by government subsidies similar to those seen in 2022. Financial markets have already adjusted their expectations, pricing in nearly three rate hikes to the 2% deposit rate over the next year, with the first move anticipated by July.