ECB flags energy risk, markets price more hikes

On Sept. 14, European Central Bank policymakers warned that recent energy-price developments are adding to upside risks for euro-area inflation. Peter Kazimir said inflation could turn out higher than current projections, noting that his focus has shifted toward natural gas and electricity prices. He pointed to energy markets as a key factor in the near-term inflation outlook, alongside expectations of higher food inflation.

Kazimir stated that inflation risks are "clearly tilted to the upside" and emphasized that policymakers maintain an "open mind" on their next move. He said this openness should not be interpreted as hesitation, stressing that the ECB will act decisively if incoming evidence justifies further steps. The comments underline a policy stance that remains sensitive to evolving price pressures.

Kazimir highlighted that natural gas prices are at a four-year high, while gas storage levels are far below historic norms. He said this situation is prompting countries to rush to refill storage, a dynamic that is contributing to surging gas prices. The resulting increase in input costs is feeding through into higher heating and electricity prices for the euro area.

These energy-cost pressures add to concerns that broader consumer prices could remain elevated. Kazimir also indicated an expectation that food inflation will pick up, reinforcing the view that price dynamics may stay stronger than previously anticipated. Together, these factors shape a risk profile that leans toward higher, rather than lower, inflation outcomes.

Isabel Schnabel, a member of the ECB Executive Board, described recent moves in energy prices as "quite concerning." She said that decision-makers are considering additional interest-rate increases in response to these developments. Her remarks align with Kazimir's signal that the central bank remains ready to adjust policy if warranted by data.

Financial markets reflected these signals on Sept. 14, with traders assigning roughly a 60% probability to a rate hike at the ECB's Oct. 29 meeting. A further move by the end of the year was judged to be fully priced in. Despite the shift in rate expectations, the euro showed little immediate reaction, with EUR/USD (EURUSD) around 1.1540 and about 0.5% lower at the time of reporting.

The combination of firm inflation risks, elevated energy prices, and market pricing of further tightening suggests that monetary policy decisions in the coming weeks will be closely linked to incoming data on gas markets and consumer prices. The subdued currency response underscores that much of the prospective policy path is already embedded in market expectations.