Global Market: ECB may need further rate hikes as inflation risks remain elevated, Dolenc says

The European Central Bank may need to raise interest rates further as inflation risks remain tilted to the upside, though the timing and scale of any additional moves remain uncertain, ECB policymaker Primoz Dolenc said, according to a Reuters report.

Dolenc, who is also governor of Slovenia's central bank, said persistent inflation and geopolitical conflicts continued to support a move towards a more restrictive monetary policy stance. He added that future decisions would depend on incoming economic data and would be taken on a meeting-by-meeting basis.

The ECB has raised its deposit rate twice this year to 2.5% as inflation accelerated to 3.8% last month, nearly twice the central bank's 2% target. Policymakers are assessing whether higher energy costs linked to the Iran war could become embedded more broadly in the euro zone economy.


According to Reuters, however, the composition of recent inflation data offers some reassurance. The latest increase was largely driven by energy prices, while core inflation has remained relatively stable, indicating limited spillover into services and other underlying components.

Inflation risks remain skewed higher

Dolenc said the risks to the inflation outlook remained tilted towards higher prices, particularly because of uncertainty surrounding energy markets.

European gas storage levels ahead of winter are a concern, with any renewed increase in wholesale gas prices potentially passing through to consumers relatively quickly. Food prices could also come under pressure from elevated input costs, drought conditions and the effects of El Niño.

The euro zone's stronger-than-expected economic performance is another potential source of inflationary pressure. The region's economy expanded at its fastest pace in four years in the second quarter, despite expectations that the energy shock would significantly weigh on growth.

Dolenc said the resilience was supported by household consumption and services spending, suggesting that economic activity could remain relatively firm. Survey indicators also point to continued strength.

Rising bond yields a growth risk

Higher longer-term borrowing costs have emerged as a potential downside risk to growth. ECB Executive Board members Philip Lane and Isabel Schnabel have warned that rising yields could weigh on economic activity more than previously anticipated.

Investors have been particularly concerned about the rising premium demanded to hold French government debt, prompting debate over whether the ECB could eventually intervene in bond markets.

Dolenc played down concerns over a disruption in monetary policy transmission, saying financial conditions across the euro zone continued to reflect ECB policy effectively.

According to Reuters, his comments suggest that policymakers remain focused on ensuring that higher borrowing costs do not create financial fragmentation, while continuing to assess whether further rate increases are necessary to bring inflation sustainably back towards the ECB's target.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)