ECB may need to act if energy price rises more persistent– Schnabel

Rising energy prices may force the European Central Bank to stop “looking through” high inflation and act to temper price growth, particularly if the green transition proves inflationary, ECB board member Isabel Schnabel said. Inflation hit a record high 5% last months, more than twice the ECB’s 2% target but the bank has not tightened policy so far, arguing that price growth will abate on its own as transitory one-off factors are the main reasons for high inflation. “The green transition poses upside risks to medium-term inflation,” Schnabel said in a speech. “Rising energy prices may require a departure from a ‘looking through’ policy.”

Schnabel said there were two scenarios in which the ECB would have to change policy. The first one is if high energy prices feed through to other sectors of the economy and alter price setting behaviour. “So far, however, there are no signs of broader second-round effects,” Schnabel argued. “Wage growth and demands by unions remain comparatively moderate.” The second scenario would be if the path of energy prices, heavily impacted by carbon taxes and the green transition, threatens to push headline inflation above target. Supply and demand imbalances may remain protracted amid the transition and carbon prices are likely to rise further, meaning that the contribution of energy and electricity prices to consumer price inflation could be above its historical norm in the medium term, Schnabel added. Schnabel added that a carbon tax is unlikely to be a negative for economic growth and studies suggest that it could even have a modest positive impact.