The European Central Bank (ECB) surprised markets by lifting interest rates again toward the end of July, a move that came in higher than many had anticipated at the June gathering as it sought to counter the 0.5 percentage point inflation spiral. Yet the decision carried its own internal logic. While a large majority of participants backed the increase, a subset opted to align with the board’s earlier stance, nudging the policy rate up by a quarter of a percentage point, a level the board had signaled weeks earlier in its minutes released on Thursday.
The President of the European Central Bank, Christine Lagarde, signaled this direction in a post-meeting appearance, noting that the move marked the first of its kind in over a decade and drew a broad, though not unanimous, consensus. The minutes clarified the split within the council, showing that some members feared risk-recession traits and favored a more gradual normalization of monetary policy alongside a 25 basis point increase that would be better aligned with evolving economic realities.
Nevertheless, most advisers insisted the ECB should demonstrate that it was willing and able to respond to higher-than-expected, persistent inflation in June. They argued that a 50 basis point hike would have provided clearer guidance to markets, but after substantial deliberation, council members emphasized their determination to present a unified stance even as opinions diverged. There was a sense of reconciling competing pressures while maintaining a coherent message about future policy steps.
rebalancing of forces
Underlying this debate is a subtle shift in the balance of power within the governing council. Time will tell whether the shift is temporary or signals a more durable realignment. Since Mario Draghi’s presidency began in 2011, some directors have pushed for a flexible, broad interpretation of the ECB mandate that weighs the economic backdrop more heavily. A bloc favored a steady adherence to price stability, while a newer cohort argued for a more adaptable approach. Last July, a second line of thinking appeared to gain ground, though the transition remains contested.
Regarding the Transmission Protection Instrument (TPI) — the emergency monetary tool designed to safeguard financial stability by containing risk premiums when needed — the debate split between cautious and hawkish voices. The hawks expressed reluctance before the meeting but ultimately supported the instrument, recognizing that its presence could provide essential guardrails. The aim was to reassure markets and governments that public finances would not be neglected in the pursuit of price stability. The TPI’s role, thus, became a focal point in balancing risk management with fiscal responsibility across euro-area economies including Italy, Spain, Greece, and Portugal.
The minutes reveal that ECB advisors emphasize the persistence and potential expansion of inflation over the fear of a near-term recession. They warned that inflation could remain stubbornly high, especially if energy supplies undergo shocks, such as disruptions in gas flows or other price drivers. A weaker euro, while hurting import costs, can amplify price pressures, given that energy and raw materials are priced in dollars. In such a scenario, the euro’s decline could magnify inflationary pressures across the monetary union, complicating the path to stabilization. The document, published subsequently, underscores the delicate balance the ECB faces as it weighs inflation risks against growth prospects and financial stability in a shifting global energy landscape. — Source: ECB minutes (as reported by market observers)