Policies to deal with climate change are likely to keep energy prices higher for longer and could force the European Central Bank to pull back stimulus measures faster than planned, one of their senior executives warned.
Isabel Schnabel, the ECB executive director responsible for market operations, said the plan to transition from fossil fuels to a greener low-carbon economy “poses measurable upside risks to our baseline inflation forecast over the medium term.”
After the economy recovered from the impact of the coronavirus pandemic, a sharp increase in energy prices pushed inflation to 5% in December, record high for the euro area. But the ECB has forecast a fall in energy prices and has pledged to keep monetary policy extremely loose for at least another year.
However, the inflationary impact of the green energy transition may force the central bank to reconsider this view, Schnabel said, speak via video link to the annual meeting of the American Financial Association on Saturday.
“There are circumstances where central banks will need to break the popular consensus that monetary policy should look through rising energy prices to ensure price stability over the medium term,” Schnabel said.
Energy prices in the 19 countries that share the euro rose 26% in December from a year earlier, close to record highs set last month. Natural gas prices rise high record in the region last year, causing wholesale electricity prices to rise to €196 per megawatt-hour in November – nearly four times the pre-pandemic average – the ECB executive said.
“While in the past energy prices have often fallen as quickly as they have risen, the need to step up the fight against climate change may imply that fossil fuel prices will now not only stay high, but even keep going up if we want Schnabel to say.
The German economics professor, who joined the ECB board two years ago, has emerged as a vocal critic Among the top executives of its vast bond-buying program, the program has acquired a portfolio of assets worth €4.7 billion since it began seven years ago.
Last month, the ECB responded to concerns about rapidly rising prices by announcing a “step-by-step” reduction in its asset purchases from 90 billion euros a month last year to 20 billion euros a month in October. But other central banks – including the US Federal Reserve and the Bank of England – are tightening policy faster, and critics say ECB should do the same.
Schnabel outlined “two scenarios where monetary policy would need to change”. One is if persistently high energy prices lead consumers to expect inflation to continue to be high and create a 1970s-style price spiral. But she says “so far” wages and requirements are union “remains relatively moderate”.
A second scenario is if policies to deal with climate change, such as carbon taxes and measures that compensate poorer households for higher energy costs, turn out to increase pressure inflation – as recent studies show it does happen – she said.
Philip Lane, the chief executive of the ECB, seems to disagree. He told Irish broadcaster RTE on Friday said that while rising energy prices were “a big concern”, “there will be less upside this year” and he is confident “supply will change, overall pressure will ease”. less this year”.
Like most central banks, the ECB has been surprised by its continued increase price pressure. Last month, it sharply increased its eurozone inflation forecast for this year to 3.2%, while predicting it would fall back below its 2% target next year.
But Schnabel said the assumption is “rooted from future curves” suggesting that energy prices will not contribute to overall inflation over the next two years, adding that “these estimates could be careful”. If oil prices stay at November 2021 levels, she said it will be enough for the ECB to hit its inflation target in 2024.
