Eurozone medium term inflation outlook is characterized by an exceptionally large degree of uncertainty that could increase due to the adverse supply shocks and climate-related risks, and hence, policymakers cannot predict a peak rate or the duration of the tightening phase as they embrace the data-dependent approach for each policy rate-setting session, European Central Bank Executive Board Member Isabel Schnabel said Thursday.
“Upside risks include stronger-than-expected growth in unit labor costs, possibly driven by lower than projected productivity growth, firmer corporate pricing power and risks of new adverse supply-side shocks,” Schnabel said in a speech in Frankfurt.
“If such risks materialized, inflation could subside only very gradually or could even reaccelerate.”
“Amongst these upside risks, climate-related risks seem more pressing than ever,” the policymaker added.
Given the data-dependent approach, policymakers can also not commit to future actions, Schnabel said.
The ECB has undertaken the most aggressive tightening cycle in its history in the face of runaway inflation.
Economic activity in the euro area has moderated and is likely to weaken further in the future despite the resilience in the labor market, the policymaker said.
While headline inflation has eased in recent months, the underlying price pressures remain, causing concern for the rate-setters.
Investors have revised their expectations for economic growth, inflation and monetary policy in the past few weeks, leading to a decline in real risk-free rates across the maturity spectrum back to their February levels, Schnabel pointed out.
“This decline could counteract our efforts to bring inflation back to target in a timely manner,” Schnabel said.
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