By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Christodoulos Patsalides on Wednesday said persistent price pressures would make the direction of monetary policy clear, while noting that meaningful second-round effects had yet to emerge and oil prices had fallen substantially.

In opening remarks for a video conference, the Central Bank of Cyprus Governor said policymakers needed to assess whether higher energy costs were becoming embedded in inflation more broadly.

“Should price pressures persist, the direction of travel is clear,” Patsalides said.

There were signs that the energy shock’s effects could be spreading, with modest upward pressure on food and services inflation, according to Patsalides. However, underlying inflation remained broadly stable and core inflation was unchanged, he said.

Patsalides noted the recent substantial retreat in crude prices but stressed the need to monitor their future path. The duration of the conflict would itself increasingly influence price formation and inflation expectations, he warned.

“The evolution of inflation expectations requires heightened vigilance,” he said.

Although longer-term expectations remained firmly anchored, short-term expectations were persistently elevated, according to Patsalides, who called for closer examination of how cost increases spread between sectors and feed into prices.

Explaining October’s decision to leave rates unchanged, Patsalides said inflation expectations remained contained, monetary transmission was effective and second-round effects had failed to materialize to a meaningful extent.

The inflation shock continued to originate mainly on the supply side, he said, citing ECB analysis attributing around 90% of the increase in energy inflation to adverse supply developments associated with the Middle East conflict.

Patsalides argued that preserving policy credibility required consistent use of the ECB’s analytical framework, with decisions taken meeting by meeting on the basis of incoming data, underlying inflation and policy transmission.

Turning to artificial intelligence, Patsalides warned that increasingly complex financing arrangements were making the risks behind the investment boom harder to assess.

As capital expenditure outpaced cash generation, AI companies were turning more heavily to bonds, private credit and financing involving interconnected ownership structures, he said.

Technology and hardware companies had reportedly issued about $350 billion in bonds this year, roughly twice the amount over the same period a year earlier, according to Patsalides. He put outstanding hyperscaler bonds at around $570 billion, including €39 billion denominated in euros.

Investors had so far absorbed the additional issuance smoothly, with little evidence of a material squeeze on financing for other sectors, Patsalides said. Nevertheless, continued expansion in AI investment could make its funding needs increasingly consequential for capital markets, he warned.