The ECB raised some of its inflation projections last week when it lifted interest rates but oil and gas prices are already well above the “baseline” levels in those forecasts, suggesting that high price growth could prove more persistent than feared
International News via Reuters:
Euro zone inflation could turn out higher than already elevated projections and recent energy price developments are concerning, particularly the surge in natural gas costs, European Central Bank policymakers said on Monday.
The ECB raised some of its inflation projections last week when it lifted interest rates but oil and gas prices are already well above the “baseline” levels in those forecasts, suggesting that high price growth could prove more persistent than feared.
“The most recent energy price developments have been quite concerning,” ECB board member Isabel Schnabel said in Berlin.
“It’s actually not just oil,” said Schnabel, an outspoken policy hawk. “It’s also refined products, like diesel… and of course, what also matters greatly for Europe is gas, which has also reached very high levels.”
LEAVING ADVERSE, MOVING TOWARDS SEVERE
The ECB’s projections foresaw December gas futures at €60.1 per megawatt hour under the baseline, with the adverse scenario putting it at €77. The current market price is over €83.
A similar trend is happening with oil: Brent crude is now trading at $107 a barrel, well above the price assumed in the ECB’s adverse scenario.
“Inflation risks are clearly tilted to the upside,” Slovakia’s central bank chief Peter Kazimir said on Monday.
“My attention is now focused less on oil and fuel prices, but increasingly on gas and electricity prices. Food inflation, so important for perceptions and expectations, is also expected to pick up.”
This deterioration in the inflation outlook could herald more rate hikes, which would put the ECB’s key rate, now at 2.5%, into a territory that restricts economic growth.
“The case is building up for more tightening,” Latvian central bank chief Martins Kazaks told Reuters.
“Interest rates may need to wade into restrictive territory,” Kazaks said. “There’s no unobservable threshold, or some higher bar to reach, for the rates to move above 2.50%.”
Other policymakers were more cautious, however, and argued that the ECB should stick to its meeting-by-meeting approach and signal higher rates once more evidence is amassed.
European countries that rely on natural gas for heating hesitated to fill storage facilities over the summer in the hope that the Iran conflict would end and prices fall sharply.
With storage levels far below historic norms, they are now rushing to store gas, helping push natural gas prices to a four-year high. That in turn is likely to push up heating and electricity costs for households and businesses and fuel inflation more broadly.
Some economists argue, however, that the sharp increase in renewable energy production since Russia’s invasion of Ukraine and a slowdown in energy-intensive sectors like heavy industry makes the bloc less sensitive to natural gas prices.
Food price growth has meanwhile been unexpectedly low, although a perfect storm of factors, including a European drought, the broader El Nino weather phenomenon and soaring diesel and fertiliser prices, key inputs in agriculture, is expected to push up prices in the coming months.
ECB policymakers will next meet on October 29. Financial markets see a roughly 60% chance of a rate hike then, while a move by the end of the year is fully priced in.
Reporting by Balazs Koranyi, Francesco Canepa and Miranda Murray, Editing by Louise Heavens and Catherine Evans
