Interview with Reuters
The European Central Bank warns rising energy prices are reshaping inflation and growth outlooks, with markets increasingly focused on energy-driven rate expectations.
Energy prices have surged beyond the ECB’s latest projections, already altering the inflation and growth outlook less than a week after publication. Financial markets now price rate paths primarily on energy costs, reflecting a shift from earlier expectations that Middle East tensions would ease. The Governing Council notes heightened uncertainty driven by geopolitics, with decisions to be made meeting by meeting based on incoming data. Energy prices remain a focal point for market expectations regarding inflation and terminal rates.
The ECB emphasizes it does not provide forward guidance and bases decisions on a broad set of economic data, not solely energy prices. While markets price multiple rate hikes over the next year, the ECB cautions against overemphasizing energy prices, noting their broader economic context. High energy prices risk sustaining inflation through autumn, potentially dampening household incomes and consumer spending, which would weigh on GDP growth.
Europe’s lower gas storage levels ahead of winter raise concerns about a potential gas shock, though gas is less critical as a marginal driver of electricity prices than previously. Oil prices feed directly into headline inflation via fuel costs, while gas has a more persistent impact through utility bills and producer input costs. Renewables now account for 26% of final energy consumption and 50% of electricity consumption, supported by a 15-20% expansion in renewable capacity and energy efficiency investments in recent years.
The ECB highlights resilience in the euro area economy despite higher interest rates and energy costs, with lending rates for mortgages and corporate loans rising alongside bank funding costs. Growth has been supported by stronger-than-expected private consumption and frontloaded exports, though the ECB warns this may not persist if persistently higher prices erode real purchasing power. The ECB confirms it has raised rates twice at projection meetings and will continue to adjust policy gradually based on incoming data.