MNI BRIEF: Energy, Fiscal Making ECB's Life Harder - DNB Knot

Soaring increases in energy prices caused by the war in Ukraine have made it hard to keep inflation in check Dutch central bank governor Klaas Knot told MPs on Thursday, with upwards wage pressures and expansive fiscal policy creating additional challenges.

Wage growth and the increase in the minimum wage also pose an inflationary risk. One-off wage hikes are logical in the face of high inflation, but automatic wage indexation will make it all the more difficult to bring inflation down. Finally, prolonged expansionary fiscal policy can boost inflation further. Efforts to curb inflation are helped when fiscal policy works in the same direction as monetary policy.”

The longer-term issuance basis of highly indebted southern European member states has so far cushioned the financial stability risks associated with rapidly increasing interest rates, Knot said. However, doubts about debt sustainability could resurface if economic growth weakens.