ECB's Rehn Says Rising Yields May Dampen Euro Zone Inflation Pressures

European Central Bank (ECB) policymaker Olli Rehn stated on Tuesday that the rapid energy inflation in the euro zone has not yet spread to other goods and services. He noted that the recent rise in bond yields is likely to dampen price pressures by slowing growth. Euro zone inflation is currently above the ECB’s 2% target, and policymakers are debating further rate hikes following two increases this past summer.

Rehn emphasized that while inflation risks are tilted higher, opposing economic forces are at play. The increase in long-term interest rates is contributing to a slowdown in growth and reducing the pass-through of energy prices to other prices and wages. ECB board member Isabel Schnabel recently warned that borrowing costs could dampen medium-term inflationary pressures more than assumed.

Yields have surged to more than decade highs across the bloc, driven partly by U.S. yield increases and concerns over debt sustainability in Europe. Rehn acknowledged high energy prices and the economy’s resilience, partly due to strong investment in artificial intelligence. This resilience suggests more price pressures than initially anticipated, according to some policymakers.

Financial markets anticipate two to three more rate hikes from the ECB in the current cycle, with an 80% chance of a move by December. Rehn, however, refrained from advocating a specific policy step, adhering closely to the ECB’s recent approach of not signaling moves ahead of decisions.