The ECB’s executive director warns that stimulating green energy will increase inflation

The ECB’s executive director warns that stimulating green energy will increase inflation

Policies to combat climate change 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 top executives.

Isabel Schnabel, the ECB’s executive director responsible for market operations, said the planned shift from fossil fuels to a greener low-carbon economy “poses measurable risks upwards for 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. However, the ECB predicted that energy prices would fade and 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 look through rising energy prices to ensure price stability in the medium term,” Schnabel said.

Energy prices in the 19 countries that share the euro rose 26 percent in December from a year earlier, close to the record level set last month. Natural gas prices hit record heights 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 are to meet Paris climate agreement, ”Schnabel said.

The German professor of economics, who joined the ECB’s board of directors two years ago, proved to be the greatest vocal critic among its top executives of its huge bond-buying program, which has acquired a 4.7 billion-euro asset portfolio since its inception seven years ago.

Last month, the ECB 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 do the same.

The ECB’s executive director warns that stimulating green energy will increase inflation

Schnabel cited “two scenarios in which monetary policy should change course”. One is if persistently rising energy prices have caused consumers to expect high levels of inflation to continue and created a wage-price spiral in the style of the 1970s. But she said that “so far” salaries and union demands “have remained relatively moderate”.

Another scenario is to show that policies to combat climate change, such as carbon taxes and measures to compensate poorer households for higher energy costs, 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 “fewer positives this year” and he was convinced “supply will change and pressures should ease this year”.

Like most central banks, the ECB was surprised by the persistence of growth price pressure. Last month, it sharply raised its eurozone inflation forecast for this year to 3.2 percent, while it predicted it would fall below its 2 percent target next year.

However, Schnabel said the assumption was “derived from futures 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.

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