Estonian policymaker Madis Muller warned that the European Central Bank could arrive at its April 30 policy session without firm evidence that a recent spike in inflation requires an interest rate increase. Speaking on the sidelines of the IMF and World Bank spring meetings in Washington, Muller cited the recent rise in euro zone inflation to 2.5% last month and said the war in the Middle East has pushed up energy costs, creating the risk that price pressures could broaden.
"At this point there is no hard data on that yet," he said, urging caution about moving too quickly. Muller added that it would take time for more pervasive inflationary pressures to materialize, and "it might therefore be difficult to tell by the end of April if we need to be concerned about it."
While he did not rule out a rate increase this month, Muller said the ECB must keep its options open because developments in the conflict could alter the outlook in ways that warrant a policy response. "For example, something could go terribly wrong with the peace negotiations," he said, adding that "the duration of the war is the biggest unknown that will drive energy prices and will have broader implications for growth and inflation."
Muller argued that policymakers should not simply assume the inflation shock will be short-lived or temporary, and he emphasized that the June meeting is likely to offer a more robust information set for decision-making. "By June we will have a lot more information. Well have additional inflation figures, more hard data, new projections, and better indication for the development of inflation expectations," he said.
Officials have signaled caution about moving as soon as this month, noting they have yet to see clear evidence that the energy-driven inflation increase is becoming broad-based or entrenched. Financial markets currently assign about a one-in-five chance of an ECB rate hike this month, market pricing shows, with a move in June nearly fully priced and an additional tightening expected in the autumn.
Muller's comments underscore the tension facing the ECB: act pre-emptively to prevent second-round effects from rising energy costs, or wait for corroborating data to ensure the shock is not transient. He said that a premature judgment that the shock is temporary would be a mistake, given the uncertainty over the conflict's duration and its implications for energy markets, growth, and inflation.
The policymaker also stressed that unexpected changes in the geopolitical situation could force a reassessment of the outlook. Given that possibility, the ECB needs to maintain flexibility in its deliberations ahead of both the April and June meetings.
Context and implications
- The immediate policy question is whether rising energy costs will translate into broader inflationary pressures that warrant higher interest rates.
- Muller highlighted that more comprehensive evidence will be available by June, in the form of fresh inflation data and new projections.
- Market pricing currently reflects limited odds of an April hike, strong odds of a June move, and expectations for a further tightening in autumn.