On Thursday (October 12), Pierre Wunsch, the president of the Belgian central bank and the governing board of the European Central Bank, said that while the latest inflation data in the euro zone is welcome, the risk posed by oil prices may prompt the European Central Bank to raise interest rates again.
In September this year, international oil prices rose sharply, and the U.S. WTI oil price once exceeded $95 per barrel. Following this week's escalation of the Israeli-Palestinian conflict, the International Energy Agency said it "stands ready to act if necessary to ensure markets remain well supplied".
Commenting on the continuing volatility in global oil prices, Wunsch said: "You know, this is one of the factors that could push up inflation... Inflation could be higher and if we don't think we can meet our target [by 2025] then we have to do more."
Last month, the European Central Bank raised interest rates for the 10th time in a row, pushing them to a record high of 450 basis points. "Interest rates have reached levels that can be sustained for a sufficiently long period to contribute significantly to a timely return of inflation to target," Mr. Wunsch said.
Like most central bankers, Mr Wunsch told the press that eurozone inflation was "moving in the right direction" and that if it evolves in line with current forecasts there would be no need to raise interest rates again, but "if inflation is slightly higher than our forecasts then we should also have to take further action."
In 2021, many members of the European Central Bank thought that energy market-driven inflation was "transitory." Asked if that marked a change in central bank practices, Mr. Wunsch responded, "I think it's just a change in our interpretation of the impact of a series of shocks."
He noted that the central bank's internal observations and modeling of inflation over the past 23 years have led policymakers to believe that "sustained inflation is virtually impossible." "We hadn't seen inflation above 2 percent for a long time, so we thought we could withstand a lot of shocks."
At the end of last month, Eurostat released preliminary statistics showing that the eurozone's annual inflation rate slowed from 5.2% to 4.3% in September, more than expected, due to base effects and falling demand, with energy prices falling 4.7% year-on-year.
The data also show that Belgium's expected annual inflation rate is already just 0.7 per cent, lower only than the Netherlands' -0.3 per cent.
Mr Wunsch said ECB officials should consider starting earlier to reduce the nearly €1.7tn of bonds they bought during the pandemic. While the ECB has said it will continue to reinvest maturing securities in the so-called PEPP portfolio until the end of 2024, there isn't any strong reason to do so today.
Commenting on the possibility of a rate cut in the coming months, Wunsch said it would take more than lower-than-expected inflation. If a couple of economic surprises come in below expectations, that doesn't mean the ECB has to cut rates pre-emptively.