ECB's Rehn Warns of Upward Risks as Energy Shock Continues

The European Central Bank (ECB) has acknowledged that energy prices have kept euro-area inflation high, but notes that wage growth remains moderate and there are no second-round effects yet. ECB Vice President Rehn stated that 'upward risks may be creeping in' due to the ongoing energy shock.

Rehn emphasized that monetary policy will proceed with a steady hand to secure price stability and support sustainable growth and jobs, acknowledging the strain households feel from higher oil and gas costs.

The ECB raised borrowing costs last week, its second increase since the Middle East conflict began, which Rehn justified as necessary given inflation is still above target and risks remain. He noted that the inflation hit from the energy shock has been milder than feared so far, but financial conditions have tightened, driving euro-zone yields sharply higher.

Rehn also expressed concern over governments' widespread consumer subsidies, urging them to be temporary, targeted, and tailored, as expanding subsidies could slow the green transition. He cited forecasts indicating higher inflation in 2027 and 2028, with the rate for 2028 now above the 2% goal.