ECB minutes show September hike was driven by an energy shock now expected to last into 2027

The account of the European Central Bank's (ECB) September 9-10 meeting, published on Thursday, shows that members largely agreed the inflation outlook had worsened. The account says the conflict in the Middle East and the war in Ukraine had pushed the path of energy prices higher. Members judged that a more persistent energy shock would keep headline inflation well above target into the first half of 2027. They concluded that another 25 basis point rise was warranted to bring inflation back to target in time.

Since that meeting, euro area inflation has risen to 3.8%, and French government bond yields have climbed significantly. Even so, ECB policymakers speaking on Thursday reduced market bets on another near-term hike. They argued that underlying inflation trends look more moderate than the headline figure.

The ECB's decision has a cost. A rate rise cannot add supply of oil or gas. It reduces demand by making credit more expensive for households, companies and highly indebted governments. The Economist argues that governments are mishandling the affordability crisis and should raise incomes instead of suppressing prices. Price caps and subsidies keep prices from signaling the energy shortage, and they add to the government borrowing that the ECB's tightening makes more expensive.