Climate change policies are likely to keep energy prices higher for longer and could force the European Central Bank to withdraw its incentives faster than planned, warned one of its senior executives.
Isabel Schnabel, the ECB’s executive director responsible for market operations, said the planned transition from fossil fuels to a greener, low-carbon economy “poses measurable positive risks to our initial medium-term inflation projection”.
After the economy recovered from the effects of the coronavirus pandemic, a sharp jump in energy prices brought inflation to 5 percent in December, record high for the euro area. But the ECB has forecast that energy prices will fade and has pledged to maintain its ultra-loose monetary policy for at least another year.
However, the inflationary impact of the transition on green energy could force the central bank to reconsider this position, Schnabel said. speaking via video link to the annual meeting of the American Financial Association on Saturday.
“There are cases where central banks will have to break with the prevailing consensus that monetary policy should be viewed through rising energy prices to ensure price stability in the medium term,” Schnabel said.
Energy prices in the 19 euro-sharing countries rose 26 percent in December from a year earlier, close to a record high last month. Natural gas prices hit record values in the region last year, raising wholesale electricity prices to 196 euros per megawatt-hour in November – almost four times the pre-pandemic average – said the ECB’s executive director.
While in the past energy prices have often fallen as fast 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 will even continue to rise if we meet the Paris Climate targets. agreement, ”Schnabel said.
The German professor of economics, who joined the ECB’s board two years ago, proved to be the greatest loud critic among its top executives of its large bond-buying program, which has acquired a € 4.7 trillion asset portfolio since its inception seven years ago.
The ECB last month responded to concerns about the rapid rise in prices by announcing a “step-by-step” reduction in asset purchases from 90 billion euros a month last year to 20 billion euros a month by October. But other central banks – including the US Federal Reserve and the Bank of England – are tightening policy faster, critics say ECB should have done the same.
Schnabel outlined “two scenarios in which monetary policy should change course”. One is if persistently rising energy prices have caused consumers to expect continued high levels of inflation and created a spiral between wages and 1970s-style prices. But she said “for now” wages and union demands “remained relatively moderate”.
The second scenario is if policies to combat climate change, such as carbon taxes and measures to compensate poorer households for higher energy costs, are shown to increase inflationary pressures – as recent studies show is already happening, she said.
Philip Lane, the ECB’s chief executive, does not seem to agree. He said Irish broadcaster RTE said on Friday that while rising energy prices were “a major concern”, there were “less positive sides this year” and he was convinced that “supplies will shift, pressures should ease this year”.
Like most central banks, the ECB was surprised by the persistence of growth price pressure. Last month, he sharply raised his eurozone inflation forecast for this year to 3.2 percent, while he predicted it would fall below the 2 percent target next year.
But Schnabel said the assumption was “derived from future curves” showing that energy prices will not contribute to overall inflation in the next two years, adding that “these estimates could be conservative.” If oil prices remain at the level of November 2021, she said that would be enough for the ECB to reach the inflation target in 2024.