MNI: Energy Little Threat To ECB’s Inflation Target- Officials
MNI (ROME) - Energy prices are unlikely to pose a risk to the European Central Bank’s 2% inflation target in 2025, with recent volatility in European gas markets seen as “speculative” and temporary, sources in the European Commission and the Eurosystem told MNI.
“2025 gas prices should be at very similar levels to last year,” said one source, adding that the expiration of a Ukrainian contract for Russian gas transit at the end of last year reduces uncertainty by clarifying the European energy landscape.
From a monetary policy perspective, gas price increases would only become an issue if they rise significantly from current levels. While oil, gas, and the euro are all higher than in the ECB’s December projections, these factors could at most add a tenth of a percentage point to short-term inflation forecasts if they persist into March, a Eurosystem source said. (See MNI INTERVIEW: ECB Agrees On Gradual Cuts To Neutral - Centeno)
The disinflationary impact of energy prices largely dissipated in 2024 as many countries rolled back fiscal measures aimed at cutting energy bills, another source from a national central bank noted. However, the timing of these rollbacks varied across countries, leaving room for some residual base effects, he added.
Concerns over imported inflation due to a weaker euro are “exaggerated,” another source said, noting that exchange rate movements mainly affect the purchase price of gas, which accounts for less than half of the final energy bill.
STRONG STORAGE CAPACITY
Market fears about a rapid decline in Europe’s gas storage due to cold weather are overstated, the source said. Storage was at 64.9% of capacity as of Jan 14, according to Gas Infrastructure Europe, but lower annual consumption means a higher percentage of gas in storage relative to demand.
Europe’s increasing reliance on renewable energy will further reduce gas consumption in years ahead, offering additional protection against geopolitical shocks, the source added.
A potential peace deal in Ukraine is unlikely to lead to a significant drop in gas prices, as Europe is not expected to restore pre-war connections to Russian supplies. Moreover, Europe’s growing reliance on U.S. liquefied natural gas leaves limited room to meet demands from U.S. President-elect Donald Trump, who has pressed for increased purchases as a way to avert tariffs.
(Additional reporting by Les Commons)