As the supply shock from rising crude oil and natural gas prices continues, the ECB is considering additional rate hikes amid concerns that prolonged energy price increases will feed through to prices and wages.
Rising crude oil and natural gas prices are affecting the economy as a supply shock, and it has been pointed out that this is not something that can be resolved through monetary policy alone. It has also been noted that higher energy prices are raising companies' production costs and reducing households' real purchasing power.
ECB Executive Board member Lane indicated that prolonged energy price increases could feed through not only to food and manufactured goods prices, but also to inflation becoming entrenched through higher wages and service prices, suggesting a rationale for considering additional rate hikes.
While the view that pressure on service prices will remain subdued is drawing attention, it has been pointed out that the significance of monetary policy could change substantially depending on energy price trends. Delayed rate hikes carry the risk of entrenching inflation, while rapid rate hikes could worsen economic conditions.
This issue is also a common challenge for the Bank of Japan, with the focus on how far inflation caused by a supply shock should be contained through monetary policy aimed solely at curbing demand.