ECB analysis on energy supply shocks and monetary policy implications

Philip R. Lane, Member of the ECB Executive Board, delivered remarks at the Centre for European Reform discussing analysis of energy supply shocks.

The ECB has estimated a Bayesian VAR model to quantify the impact of oil price shocks on the euro area economy. A geopolitical oil supply shock raising oil prices by 10% is estimated to reduce euro area real GDP growth by 0.2 to 0.3 percentage points annually over three years, with a more pronounced impact on investment than consumption.

The impact of energy shocks varies between global and regional disruptions. A global energy shock causes larger increases in import prices, terms of trade deterioration, and output decline due to reduced global demand. It also leads to more significant inflationary pressures through indirect effects on consumer prices and production costs.

Assessing indirect and second-round effects is crucial. Energy shocks influence consumer prices directly and indirectly through input costs, with second-round effects affecting wage-setting, inflation expectations, and broader price dynamics. Indicators suggest current shocks are unfolding in a less demand-supportive environment than in 2022, with supply factors playing a more prominent role.

The ECB emphasizes that monetary policy responses should consider the nature of the shock. Small, transitory deviations from inflation targets may not require immediate action, but persistent or large deviations warrant measured or forceful responses. The policy stance depends on the economic context, inflation expectations, and financial conditions, with decisions made on a data-dependent, meeting-by-meeting basis to ensure effective inflation control.