The European Central Bank (ECB) could still raise interest rates this year, particularly if the crisis in Ukraine leads to further energy price hikes, ECB board member Frank Elderson said on Thursday.
Mr Elderson, a member of the ECB’s six-person executive board and a key Frankfurt decision-maker, said he would “not exclude a lift-off” later this year.
At its most recent policy meeting, the ECB said that any increase in its main policy rate would be gradual and come “some time” after its bond-buying programme in the third quarter of 2022.
Mr Elderson said the bank’s guidance for “some time” was open to interpretation.
Timing
“It could mean a week. It could mean several months. I would say that I do not exclude a lift-off still in the course of this year,” he told an event hosted by the Dublin-based Institute of International and European Affairs (IIEA).
“Both the timing and the pace will be proportionate to the evolution of the inflation outlook in relation to our price stability objective,” Mr Elderson said. He admitted that ECB policymakers have been continually surprised by the strength of inflation, which has outgunned even the most pessimistic forecasts.
Euro zone inflation soared to another record high of 5.8 per cent last month as Russia’s invasion of Ukraine compounded existing price pressures in the bloc’s economy.
The Economic and Social Research Institute has warned it could climb as high as 8.5 per cent in the Republic in the coming months, creating a major cost-of-living shock for households.
Mr Elderson appeared, however, to rule out a return to 1970s-style stagflation, where high inflation is coupled with low growth.
The 1970s were bookended by two energy price shocks linked to global oil supplies, which triggered exactly this dynamic.
Prices
While the euro zone economy faced “unprecedented uncertainty” from the pandemic, now reinforced by the Ukraine crisis, it was still expected to grow this year, Mr Elderson said.
“Even if global oil prices do not increase any further and stabilise at high levels, we currently expect inflation to be above our 2 per cent target well into 2023, before settling around target in 2024,” he said.
“With inflation stubbornly above our target for so long, some concerns have been raised about the risk of second-round effects, which could make high inflation even more persistent,” the banker said.
“These effects describe a situation where high inflation feeds into higher wages, implying increased costs for businesses, which would lead to higher inflation still,” he said, noting the current outlook accounted for some of these effects.
Mr Elderson said there were two important channels through which the war weighs on the euro area economic outlook: negative confidence effects, which have an impact on both international trade and financial markets, and higher prices, particularly energy and commodity prices.
