Global Market: Eurozone energy inflation has yet to spread to broader prices, ECB's Rehn says

Rapid energy inflation in the eurozone has not yet spilled over into other goods and services, while rising bond yields could help ease price pressures by weighing on economic growth, European Central Bank policymaker Olli Rehn said on Tuesday, according to a report by Reuters.

Eurozone inflation is currently running well above the ECB's 2% target, prompting policymakers to debate how much further interest rates may need to rise following two rate increases over the summer.

Several ECB policymakers have warned that inflation risks are tilted to the upside, but Rehn highlighted opposing forces within the economy that could limit further price pressures.


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He said the recent increase in long-term interest rates was contributing to slower economic growth and reducing the extent to which higher energy costs were being passed through to consumer prices and wages.

ECB Chief Economist Philip Lane has also pointed to the potential impact of tighter financial conditions on inflation. ECB board member Isabel Schnabel, one of the central bank's more hawkish policymakers, has similarly warned that the economy could react more strongly to higher borrowing costs than previously expected, potentially reducing medium-term inflation pressures.

Eurozone government bond yields have climbed to their highest levels in more than a decade, driven partly by rising U.S. Treasury yields and growing concerns over debt sustainability in some European countries.

Rehn did not signal support for a specific policy move, maintaining the ECB's approach of avoiding forward guidance on interest-rate decisions.

Financial markets currently expect another two to three rate increases during the current tightening cycle, with an around 80% probability of a hike by December.

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At the same time, Rehn acknowledged that energy prices remain elevated and that the euro zone economy has shown considerable resilience. Strong investment in artificial intelligence has been one factor supporting economic activity.

The report stated that this resilience has raised concerns among some ECB policymakers that underlying price pressures could prove stronger than previously anticipated, complicating the central bank's efforts to bring inflation sustainably back to its 2% target.

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