ECB's Rehn: High yields to dampen energy price pass-through

ECB’s Rehn: High Bond Yields Could Limit Energy Price Pass-Through Impact

ECB Policymakers Weigh Inflation, Bond Yields, and Economic Resilience

Energy Inflation and Its Containment

HELSINKI, Oct 6 (Reuters) - Rapid energy inflation across the euro zone has not yet spread to other goods and services, and the recent rise in bond yields is likely to dampen price pressures as it weighs on growth, European Central Bank policymaker Olli Rehn said on Tuesday.

Euro zone inflation is now running well above the ECB’s 2% target, and policymakers are debating just how much more they need to hike rates on top of the two moves this past summer.

Contrasting Views Among Policymakers

While a host of policymakers have said that inflation risks are tilted to higher readings than predicted, Rehn said there were other considerations, too, as opposing forces were at work in the economy.

"The rise in long-term interest rates is contributing to a slowdown in growth and also to a reduction in the pass-through of energy prices to other prices and to wages," says Rehn said, echoing some of ECB chief economist Philip Lane's comments.

Concerns Over Borrowing Costs and Debt Sustainability

ECB board member Isabel Schnabel, an outspoken policy hawk, has also warned recently that the economy could respond more to surging borrowing costs more strongly than assumed, which would dampen medium-term inflationary pressures.

Yields have risen to more than decade highs across the bloc, partly as they follow U.S. yields higher and partly because of increased debt sustainability concerns in Europe.

ECB Policy Approach and Market Expectations

Rehn, however, stopped short of advocating a policy step and instead stuck very closely to the ECB's recent policy of not signalling moves ahead of decisions.

Financial markets see two to three more rate hikes from the ECB in the current cycle, including an 80% chance of a move by December.

Economic Resilience and Future Outlook

Rehn also acknowledged that energy prices are high and the economy is proving exceptionally resilient, partly on strong investment into artificial intelligence, Rehn added.

This resilience, some policymakers have said, suggests more price pressures than earlier thought.

(Reporting by Essi Lehto; writing by Balazs Koranyi; Editing by Hugh Lawson)