SINTRA, Portugal, June 30 - European Central Bank officials said on Tuesday that a recent easing in oil prices is welcome, but they underlined that energy costs remain elevated and the shock to the economy will persist for some time, sustaining upward pressure on prices.
The bank increased interest rates last month and policymakers are weighing whether further monetary tightening will be required in coming months. That debate continues even as hopes for a Middle East peace deal have coincided with a fall in crude since the ECB's June 11 rates decision. Market pricing already assumes another rate move and officials say that option remains firmly on the table.
"In terms of the overall inflation impulse, the fact that we do have, maybe for a couple of years, oil prices above the pre-war level, that essentially is a cost-increasing impulse to the economy,"
The ECB's chief economist, Philip Lane, made that comment in an interview on Bloomberg TV, emphasizing that persistently higher oil compared with pre-conflict levels acts as a continuing upward cost pressure on the economy.
Bundesbank President Joachim Nagel said energy prices have fallen more quickly than the ECB earlier anticipated, which has eased some immediate price pressures. The bank's milder projection had anticipated Brent crude around $78 a barrel by year-end; Brent is already trading below $73 and futures suggest the possibility of further declines.
"I have to admit that the retreat of energy prices, oil prices, this was a surprise,"
Nagel told CNBC that the faster-than-expected retreat was notable, but he and Lane cautioned that ongoing supply constraints and the requirement to rebuild oil inventories could keep prices relatively high for an extended period.
"The energy price shock that started with the conflict in the Middle East is not over, is still in the system, so I expect inflation rates will stay significantly above our target,"
Belgian central bank chief Pierre Wunsch offered a different emphasis on the policy path, saying the argument for another rate rise is less strong than it appeared in June. He said markets are pricing a further hike but "not as much as we thought in June," and added that if another increase is needed he would prefer any move to be taken quickly - noting that this does not necessarily imply a July decision.
Financial markets placed the probability of a July rate increase at about 33 percent, and a further move is priced in fully only by December.
Context and implications: Officials welcomed the relief brought by lower oil but repeatedly stressed that the energy shock has left lasting effects that will continue to influence inflation. That caution keeps additional tightening a possible response, even as some policymakers see the immediate case for another hike as reduced.