By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Martin Kocher said Friday that if the economic and inflation situation failed to improve in the near term, the monetary policy environment would point to a need for a policy response.
Kocher, who heads the Austrian National Bank, said in a blog post on his institution’s website that the Governing Council had been right to leave interest rates unchanged at its October meeting, given the opposing effects of higher energy prices and tighter financial conditions.
“If the situation does not improve in the near future, the monetary policy environment points to a need to respond,” he said. “The risks to inflation have clearly increased.”
At the same time, Kocher cautioned that neither premature action nor passive waiting would safeguard price stability, saying the essential task was “to do the right thing at the right time.”
Energy prices had risen significantly above the assumptions in the ECB’s September baseline and in some cases even exceeded the price assumptions in the adverse scenario published at the time, according to Kocher.
He stressed that this did not mean the adverse scenario as a whole had become the most likely outcome, but said it demonstrated that inflation risks had increased.
There was still no clear evidence that second-round effects were entrenching inflation, Kocher said, although the longer energy prices remained elevated, the greater the risk that companies would pass on higher costs and workers would seek compensation through higher wages.
The ECB could not reverse the initial energy-price increase, he said, but monetary policy “must and will prevent the energy price shock from becoming entrenched in prices.”
Long-term inflation expectations remained broadly stable, which Kocher described as a positive signal but “no reason to sound the all-clear.”
On the other side of the policy equation, higher long-term sovereign yields were tightening financing conditions for households and companies and could curb construction, consumption and investment, thereby reducing medium-term inflation pressure, he said.
Kocher cautioned, however, that higher financing costs could also increase companies’ production costs and lead to further price increases, meaning rising yields were not automatically beneficial for price stability.
“Rising yields can therefore amplify the economic consequences of the energy shock without reliably offsetting its price-increasing effects,” he said.
According to Kocher, the interaction of higher energy prices and rising sovereign yields therefore created a monetary policy tension: premature additional tightening could further weaken economic activity, while an overly hesitant response risked allowing inflation to become entrenched.
The Governing Council had weighed those risks carefully at its October meeting and concluded that keeping policy rates unchanged was “the right response for now,” he said.
Kocher said the December Eurosystem projections, together with additional information on wages, companies’ pricing decisions and the effect of tighter financing conditions on demand, would help policymakers reassess the inflation outlook.
Future decisions would continue to depend on the inflation outlook and associated risks, underlying inflation dynamics and the strength of monetary policy transmission, he said.