The European Central Bank will not hesitate to tighten policy if the coming energy-driven inflation surge looks like becoming entrenched, keeping price growth elevated for an extended period, ECB policymaker Peter Kazimir said today.
The ECB left rates unchanged last week but signalled that the US-Israeli war on Iran risked pushing inflation well above its 2% target while curbing growth and disrupting supply chains.
"We can do little about the inflation spike in the next few months," Kazimir said in a blog post. "But if we judge that the risk of inflation remaining above our target for a prolonged period is significant, we will act with appropriate forcefulness to bring inflation back down to our target."
Inflation, at target for the past year, could rise to 2.6% under the ECB's most benign scenario and return to 2% next year. But a severe scenario sees it above 2% for years to come as the energy shock affects the price of other goods and services.
"The memory of the high-inflation years is still fresh for many," said Kazimir, Slovakia's central bank governor. "The threshold for raising prices may now be lower for many firms. Households may start demanding higher wages sooner."
Governments often try to ease the public burden but their measures are rarely temporary, tailored and targeted, so government intervention is likely to stoke inflation further and prolong price increases, Kazimir argued.
This raises a dilemma for the ECB. Energy shocks normally weigh on growth as they reduce disposable income and profit margins.
This would normally require a central bank to look past an inflation shock. But this only works if price and wage expectations do not adjust upwards, as this perpetuates inflation.
"People can rest assured we will not waver in delivering our mandate," Kazimir said. "If the path ahead gets harder, we will say so. If it requires bold action, we will not hesitate."
