ECB chief warns that green pressure will drive inflation

Climate change measures could lead to long-term electricity prices and could force the European Central Bank to remove its stimulants more quickly than planned, one official warned.

Isabel Schnabel, ECB chief executive officer in charge of market operations, said the planned shift from crude oil to low carbon resources “poses potential risks to our estimates of inflation within the medium term”.

As the economy grew due to the coronavirus epidemic, a sharp rise in electricity prices led to a 5 percent increase in prices in December, high profile for the eurozone. But the ECB has predicted that electricity prices will disappear and is committed to keeping its fiscal plan for at least another year.

However, inflationary pressures of green energy transformation could force the central bank to reconsider, Schnabel said, Speaking via video link to the annual meeting of the American Finance Association on Saturday.

“There are times when central banks will have to deal with an existing agreement that the fiscal policy should focus on rising electricity prices in order to ensure short-term inflation,” Schnabel said.

Electricity prices in 19 euro-sharing countries rose 26 percent in December from a year earlier, close to an increase last month. Natural oil prices have hit high records in the region last year, driving electricity prices to € 196 per megawatt hour in November – about four hours in the middle of the epidemic – the ECB chief said.

“While in the past, electricity prices fell sharply, the need to keep pace with climate change could mean that starting oil prices should not only be higher, but also higher if we are to achieve the goals of the Paris climate agreement,” Schnabel said.

A professor of economics in Germany, who joined the ECB two years ago, was particularly prominent anti-verbal among its top executives of its major bond buying program, which has raised € 4.7tn since its inception seven years ago.

The ECB last month responded to concerns about a sharp rise in prices by announcing a “slow” reduction in consumer spending from € 90bn a month last year to € 20bn a month by October. But other central banks – including the US Federal Reserve and the Bank of England – are actively enforcing the policy and critics say in the ECB he must do the same.

ECB assets cost € bn G2050_21X

Schnabel described the “two scenarios that the financial system needs to change”. One is if rising electricity prices cause consumers to expect higher inflation and make the 1970s more expensive. But he said “so far” payments and agencies want to “remain small”.

The second factor is that if climate change policies, such as the carbon tax and measures to compensate poor families for the high cost of electricity, lead to an increase in inflation – as recent research shows – in the past – he said.

Philip Lane, head of the ECB, does not seem to agree. He he tells The Irish publisher RTE on Friday said that while electricity prices were “extremely worrying”, there were “very few this year” and he was confident that “contributions will change, tensions should be reduced this year”.

Like many central banks, the ECB has been surprised by the persistence of the rise pressure on prices. Last month saw a sharp decline in eurozone prices this year to 3.2 per cent, where it predicted a drop of less than 2 percent next year.

But Schnabel said the idea “came from future curves” indicating that electricity prices would not contribute to lower inflation over the next two years, adding that “these figures could be unchanged”. If oil prices remained in November 2021, he said it would be enough for the ECB to achieve its inflation target by 2024.

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