Fri. Jan 21st, 2022


Policies to tackle climate change are likely to keep energy prices higher for longer and could force the European Central Bank to withdraw its stimulus faster than planned, one of its senior executives warned.

Isabel Schnabel, the ECB’s executive responsible for market operations, said the planned transition away from fossil fuels to a greener low-carbon economy “poses measurable upside risks to our baseline projection of inflation over the medium term”.

After the economy recovered from the impact of the coronavirus pandemic, a sharp rise in energy prices caused inflation to rise to 5 percent in December, a record high for the eurozone. But the ECB predicted that energy prices would fade and pledged to maintain its ultra-loose monetary policy for at least another year.

Line chart of harmonized index of consumer prices (annual% change) showing Eurozone inflation: ends the year at a record high

However, the inflationary impact of the green energy transition could force the central bank to reconsider this position, Schnabel said. talk via video link to the annual meeting of the American Finance Association on Saturday.

“There are instances where central banks will have to break with the prevailing consensus that monetary policy should look at rising energy prices to ensure price stability over the medium term,” Schnabel said.

Energy prices in the 19 countries that share the euro rose by 26 percent in December from a year earlier, close to a record high set the previous month. Natural gas prices hit record highs last year in the region, which raised wholesale electricity prices to € 196 per megawatt hour in November – almost quadrupling average pre-pandemic levels – the ECB chief said.

“While energy prices have often fallen as fast in the past as they have risen, the need to step up the fight against climate change may imply that fossil fuel prices will now not only have to remain high, but even continue to rise if we are to meet the goals of the Paris Climate Agreement, ”Schnabel said.

The German professor of economics, who joined the ECB board two years ago, emerged as the most vocal critic among its top executives of its large bond-buying program, which has acquired a portfolio of € 4.7tn assets since its inception seven years ago.

The ECB responded last month to concerns about rapidly rising prices by announcing a “step-by-step” reduction in its asset purchases from € 90 billion a month last year to € 20 billion a month by October. But other central banks – including the US Federal Reserve and Bank of England – are stepping up policy faster and critics say the ECB must do the same.

ECB's asset purchases € 120 billion G2050_21X

Schnabel “outlined two scenarios where monetary policy would have to change course”. One is when persistently rising energy prices caused consumers to expect continued high levels of inflation and created a 1970s-style wage price spiral. But she said “so far” wages and union demands remained “relatively moderate”.

The second scenario is that policies to tackle climate change, such as a carbon tax and measures to compensate poorer households for higher energy costs, appear to be increasing inflationary pressures – as recent studies indicate is already happening – she said.

Philip Lane, the ECB’s CEO, apparently does not agree. He tell Irish broadcaster RTE said on Friday that although rising energy prices were “a major concern”, there was “less upside this year” and he was confident that “supply will shift, the pressure should ease overall this year”.

Like most central banks, the ECB was surprised by the persistence of upward pressure on prices. Last month, it sharply raised its eurozone inflation forecast for this year to 3.2 per cent, while predicting that it would fall below its 2 per cent target next year.

But Schnabel said this assumption was “derived from futures curves” showing that energy prices would not contribute to overall inflation in the next two years, adding that “these estimates may be conservative”. If oil prices remain at November 2021 levels, she said it would be enough for the ECB to meet its 2024 inflation target.



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