💎 Fed’s first rate cut since 2020 set to trigger market. Find undervalued gems with Fair ValueSee Undervalued Stocks

Europe's green transition to persistently boost inflation, ECB's Schnabel says

Published 03/17/2022, 10:20 AM
Updated 03/17/2022, 11:26 AM
© Reuters. FILE PHOTO: European Union flags flutter outside the European Central Bank (ECB) headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach

FRANKFURT (Reuters) - Europe's effort to wean its economy off Russian gas is likely to be a persistent boost to inflation even beyond the current spike, European Central Bank board member Isabel Schnabel said on Thursday.

After Russia's invasion of Ukraine last month, European Union leaders agreed to accelerate the bloc's green transition, heralding an abundance of investment in renewable energy.

In the foreseeable future, the conflict is likely to remain a key contributor to inflation, as any marked decline in fossil energy prices seems unlikely, Schnabel said in a speech to a financial conference.

But even beyond the current conflict, prices are likely to rise as the transition creates a huge investment need that is likely to fuel a persistent positive demand shock, which normally generates inflation.

"Such indirect effects of higher energy prices can be a persistent source of upward pressure on underlying inflation," Schnabel said.

"They are not a one-off price shock that policymakers can simply look through, in particular when pipeline pressures are continuing to build up, like today," she added.

But Schnabel also played down concerns about the central bank's powers in acting to temper price growth during such a boom.

In the current environment, ECB tightening to combat high inflation would curb demand, just as high energy prices are already sapping household purchasing power, leaving policymakers with a dilemma.

© Reuters. FILE PHOTO: European Union flags flutter outside the European Central Bank (ECB) headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach

But the green transition beyond the current shock is more a classical, demand-driven inflation scenario, and the ECB has the tools to temper that, Schnabel said.

"Greenflation is much more likely to be the result of a strong and persistent positive demand shock, or investment boom, that re-establishes the 'divine coincidence' of monetary policy – that is, the ability of central banks to stabilise inflation and output simultaneously," Schnabel said.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.