ECB Minutes Show a Hawkish Stance, Some Officials Open to Rate Hikes

The European Central Bank's monetary policy meeting minutes indicate that all members unanimously agreed to keep the three key interest rates unchanged. However, amid the ongoing energy price shock triggered by the situation in the Middle East, guarding against short-term inflation risks has become the central consideration of the policy. The minutes show that the eurozone is facing a classic negative supply shock, with both the risk of rising inflation and the risk of economic downturn escalating simultaneously. This means that the central bank is caught in a complex policy trade-off between stabilizing prices and protecting growth. Market expectations for central bank tightening have noticeably increased, with the swap market fully pricing in 25 basis point rate hikes for both June and September, and projecting a cumulative full-year increase of 73 basis points, reflecting investors' concerns about the persistence of inflation.

Inflation Pressure Resurges Due to Energy Shocks

Influenced by the conflict in the Middle East, eurozone inflation rebounded to 3.0% in April. The European Central Bank's meeting minutes indicate that although long-term inflation expectations are still firmly anchored near 2% overall, short-term inflation risks have significantly intensified. Core inflation rate, excluding energy and food, dropped to 2.2%, and service sector inflation also fell to 3.0%. However, analysis suggests that energy costs may lead to a secondary transmission to non-energy industrial products through the supply chain. There is a high level of concern within the European Central Bank about the rightward shift in short-term inflation expectations. Short-term price expectations of households and businesses have noticeably risen, escalating decision-makers' alertness to the transmission effects of the supply chain and the stickiness of core inflation.

Policy Choices Stick to Data-Dependent Path

Internal discussions reveal a strong prudent attitude: although faced with stubborn inflation pressures, considering that there is no urgent absolute necessity to increase interest rates at present, all members ultimately supported the decision to keep policy interest rates unchanged. The European Central Bank stated in the minutes of the April 29-30 meeting: "Several members pointed out that this decision was a difficult choice. If the interest rate hike option was on the agenda, they would not have objected to raising interest rates at this meeting." As the risk of rising inflation intensifies, the policy-making layer reiterated its prudent approach of continuing to depend on data, making decisions at each meeting. The officials emphasized not pre-committing to any specific interest rate path to maintain policy flexibility. The minutes also emphasized that it is dangerous to think that the impact of energy shocks on inflation will naturally be limited if the economy weakens. Therefore, the central bank must remain vigilant and closely monitor spring wage data.

Economic Fundamentals Show Intertwining Signs of Fatigue and Resilience

The eurozone's first quarter real GDP grew only 0.1% quarter-on-quarter, less than previously expected. The April composite Purchasing Managers' Index (PMI) fell to 48.6, driven entirely by a decline in service sector activity, showing the suppression of demand by high inflation. However, the manufacturing sector shows some resilience due to defense spending and businesses' defensive stockpiling. Business surveys indicate that artificial intelligence investments, public infrastructure construction, and a stable labor market are offsetting some of the downward pressures. Overall, the European Central Bank assesses that the risk to economic growth is skewed to the downside. Decision-makers reiterated their readiness to act at any time, and the June meeting will receive a more complete economic forecast, at which time a comprehensive assessment of the policy stance will be made.