ECB ready to tighten policy if energy-driven inflation persists

Investing.com -- The European Central Bank stands prepared to tighten monetary policy if the anticipated energy-driven inflation surge shows signs of becoming entrenched, ECB policymaker Peter Kazimir said on Monday.

The ECB kept interest rates unchanged last week but indicated that the U.S.-Israeli war on Iran posed risks of pushing inflation well above its 2% target while limiting growth and disrupting supply chains.

"We can do little about the inflation spike in the next few months," Kazimir said in a blog post. "But if we judge that the risk of inflation remaining above our target for a prolonged period is significant, we will act with appropriate forcefulness to bring inflation back down to our target."

Inflation, which has been at the ECB's target for the past year, could rise to 2.6% under the bank's most benign scenario and return to 2% next year. A severe scenario sees inflation remaining above 2% for years to come as the energy shock affects the price of other goods and services.

"The memory of the high-inflation years is still fresh for many," said Kazimir, Slovakia's central bank governor. "The threshold for raising prices may now be lower for many firms. Households may start demanding higher wages sooner."

Government measures to ease the public burden are rarely temporary, tailored and targeted, so government intervention is likely to add to inflation and prolong price increases, Kazimir argued.

Energy shocks normally weigh on growth as they reduce disposable income and profit margins, which would typically require a central bank to look past an inflation shock. But this only works if price and wage expectations do not adjust upwards, as this perpetuates inflation.

"People can rest assured we will not waver in delivering our mandate," Kazimir said. "If the path ahead gets harder, we will say so. If it requires bold action, we will not hesitate."

You May Also Be Interested In

• Citigroup set to join top banks in Anthropic IPO - Bloomberg
• Parker-Hannifin (PH) Declares $2.00 Quarterly Dividend; 0.8% Yield
• Saba Capital funds reapprove merger plan targeting Q4 2026 close