The comments support the view that the ECB can hold its nerve on an energy-led price shock, which should limit pressure for tighter policy in the near term and leave the euro without a fresh rate-driven boost. His attribution of higher yields to fiscal issues rather than inflation is notable for bond traders, since it suggests the ECB sees the selloff as a matter for governments rather than for monetary policy. That points to limited appetite to lean against yields through policy. Natural gas is the swing factor, and a cold start to winter would quickly test his relaxed stance and could revive hawkish pricing.
Álvaro Santos Pereira is the governor of the Banco de Portugal, Portugal’s central bank. That makes him a member of the ECB’s Governing Council.
The ECB can live with an energy shock as long as it stays an energy shock, and so far, says Santos Pereira, it has.
Summary:
ECB policymaker Alvaro Santos Pereira said euro zone energy-driven inflation is not spreading to other prices
The share of goods and services with prices rising more than 3% or 4% has stayed broadly stable over about two years, he said
If inflation starts to broaden, central banks will be forced to act
A winter like last year’s would create a problem for natural gas prices
He said the recent rise in bond yields is more related to fiscal issues
Energy-driven inflation in the euro zone is not spreading to the wider economy, European Central Bank policymaker Alvaro Santos Pereira said, offering a reassuring signal for the bank as it weighs the risk of higher prices.
Speaking at the Bangkok Economic Festival, the Portuguese central bank governor said the good news was that inflation in Europe had not broadened so far. He pointed to the share of goods and services with prices rising by more than 3% or 4%, which he said had stayed broadly stable over roughly the past two years.
Santos Pereira also made clear where the line sits. If inflation does start to broaden, he said, central banks will be forced to act. That suggests the ECB is prepared to look through an energy shock for now, but would respond if price increases began to spread into other categories.
He flagged natural gas as the main risk. A winter like last year’s would create a problem for gas prices, he said, which would feed directly into energy costs for households and businesses. He also said the recent rise in bond yields was more closely tied to fiscal concerns than to the inflation outlook.
The measure he cited is a breadth or diffusion gauge, which tracks how widespread price increases are rather than how fast prices are rising on average. It is gaining attention among central bankers. Bloomberg Economics highlighted a similar measure for the United States this week, showing fewer US consumer price categories running hot in September. Bank of Japan board member Junko Koeda pointed to the more than 70% of Japanese CPI items rising year on year as evidence that inflation there is taking hold.
For the ECB, the readings to watch are the next euro zone inflation figures, the path of natural gas prices as winter approaches, and whether the share of fast-rising prices starts to climb.
This article was written by Eamonn Sheridan at investinglive.com.
