Sunday, January 09, 2022
Inflation at a record high
ECB director speaks of a change of course
The European Central Bank has long been of the opinion that current inflation is a temporary phenomenon and remains stubbornly with its ultra-loose monetary policy. Now the German ECB director Schnabel is indicating a change of course. This also has to do with the energy transition.
According to Director Isabel Schnabel, rising energy prices could force the European Central Bank to take action against inflation. The turn to green energy sources entails the risk of prices rising faster in the medium term, said Schnabel in a speech at a virtual event on the subject of “Climate and the Financial System”. If energy becomes more expensive, this could cause the ECB to abandon its previous monetary policy. Critics, especially in Germany, have been calling for the ECB to change course for months.
The ECB has so far advocated the thesis that the current rise in inflation is caused by temporary factors and therefore does not require any change in monetary policy, such as key interest rates or bond purchases. Central bank president Christine Lagarde recently said that inflation should have peaked in November. Rising energy prices, higher tax rates on a number of fossil fuels and relatively volatile energy demand have recently resulted in sustained upward pressure on consumer prices.
These developments presented monetary policy with challenges, said Schnabel. Monetary policy cannot afford to ignore energy price increases if they pose a risk to medium-term price stability, explained Schnabel. This could be the case if the prospect of a sustained rise in energy prices helps dampen inflation expectations or if underlying price pressures threaten to push inflation above the European Central Bank’s two percent target.
Inflationary pressure in the euro zone rose unexpectedly further in December and was 5.0 (November: 4.9) percent above the level of the same month last year. That was the highest value since 1997, when the published data series began. The ECB recently raised its inflation forecast for the new year to 3.2 percent, almost doubling it.