Frankfurt, March 23 - The European Central Bank cannot prevent an initial inflationary shock stemming from sharply higher energy costs, but it will act if those increases threaten to become entrenched, ECB Vice President Luis de Guindos told Spanish newspaper El Mundo on Monday.
The ECB left interest rates unchanged last week. Still, officials signalled they are prepared to tighten policy if elevated energy prices start to spread into the wider economy and push up the costs of other goods and services - the so-called second-round effects.
"Monetary policy cannot prevent the war from having an initial impact on both inflation and growth, but the ECB can monitor the situation and be alert to potential second-round effects," El Mundo quoted de Guindos as saying. He stressed that firms and labour unions should regard the shock as transitory; if they do not, second-round effects could follow and force the central bank to step in.
De Guindos outlined areas that the ECB will follow closely: measures of underlying inflation, price expectations and particular price components such as fertilizer and food. He also indicated that, despite higher energy costs, a recession in the euro area is unlikely under the scenarios the bank expects, since all project positive growth.
The ECB was among the last major central banks to raise interest rates during the 2021-22 inflation surge, yet it managed to bring price growth under control ahead of many peers. Inflation has remained at the bank's 2% target for the past year. However, the ECB's most recent projection shows inflation jumping to 2.6% even in its most benign scenario, with risks tilted toward higher readings.
Against this backdrop, the bank's readiness to respond to persistent pass-through from energy prices into wages and other costs underscores its vigilance on inflation dynamics rather than an attempt to counter the immediate direct effects of geopolitical shocks on energy markets.
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