Confirmed: ECB Accounts reveal growing concerns over upside inflation risks

The European Central Bank (ECB) released the accounts of its latest monetary policy meeting on Thursday, revealing growing concern among policymakers over persistent inflationary risks. The discussions show a consensus within the Governing Council that the risks surrounding the inflation outlook are skewed to the upside relative to the ECB staff's baseline projections.

The accounts indicate that headline inflation is expected to rise further over the summer and remain well above the 2% target through the first half of 2027. This outlook comes despite the projections already embedding almost three 25-basis-point interest rate hikes.

Policymakers also noted that the outlook could prove even more challenging if energy prices do not decline in line with futures market expectations. Under that scenario, above-target inflation would likely become considerably more persistent.

The discussions nevertheless suggest that Governing Council members expect the current energy shock to have a shorter-lived impact than the previous episode. However, they also warned that firms and workers are likely to react more quickly to rising prices this time, as inflation has become more prominent in economic decision-making.

The accounts further highlight that the tightening in financial conditions since the outbreak of the war has so far had only a limited dampening effect on the economy. At the same time, some members argued that the recent increase in long-term interest rates and tighter bank lending standards should gradually reduce credit demand, weigh on investment and weaken economic momentum.

Finally, policymakers agreed that the ECB should maintain neutral communication. They emphasized that it should neither suggest that the latest decision marks the beginning of a sequence of rate hikes nor imply that it is a one-off move.

The Euro (EUR) showed little immediate reaction to the release. EUR/USD continued to trade in positive territory on Thursday, gaining 0.16% on the day to trade near 1.1435 at the time of writing, suggesting that the main messages had already been largely priced in by market participants.