Peter Kažimír: Inflation risks lurk in the shadows

What has begun as an external energy shock is no longer contained at the edges of our economy. It is seeping into the economy.

Pipeline pressures are building.

This is an unwelcome transition that warrants the European Central Bank’s vigilance and preparedness to respond.

Thursday’s decision to increase interest rates was a measured and necessary step.

We see signals that price pressures are spreading beyond volatile components and are affecting everyday economic activity.

Some may be tempted to look through, to wait it out. To focus on demand stabilisation, since longer-term inflation expectations are under control.

This is no time for complacency and hesitation.

Higher energy costs are likely to remain with us longer than many had hoped. Even with the just-announced US-Iran peace framework, the damage in the Middle East cannot be undone overnight.

The longer the situation with energy supplies from the Gulf remains unresolved, the more likely it is that broader price developments will be affected.

Indirect effects and second-round dynamics must be watched closely.

Second-round effects, even though not fully visible, may be approaching. They are forming in the background, and without our deliberate action, they would materialise.

We have taken a first step towards containing medium-term price pressures. But the mission is not complete. With today’s information, it is increasingly evident that monetary policy has more work to do.

Markets broadly understand how we respond when inflation deviates from our target.

Even with another rate hike or two, core inflation remains above 2 per cent in our medium-term projection.

This is not a position I am comfortable with. We need find a new good place, an appropriately tight stance that, if maintained for some time, reliably brings inflation back to our target.

We will get there, no doubts about that. But getting there requires balancing flexibility in action with a firm commitment to delivering our target.

What’s encouraging is that the economy is showing resilience, as it has shown repeatedly in the past.

Growth remains subdued, but structural forces play a role in that too.

While the exact size and timing of our next steps will depend on incoming data, the direction of travel is clear.

I lean towards frontloading the work that needs to be done. But in highly uncertain times, being agile and responsive to incoming information is a good guiding principle.

Come what may, we won’t sit idle; we will take measured, appropriate steps to deliver on our price stability mandate.