European Central Bank (ECB) policymaker Isabel Schnabel said a stronger rise in energy prices is likely to force them to act.
In his speech over the weekend, Schnabel outlined two scenarios in which the ECB would need to change their monetary policy.
First, if high energy prices enter other sectors of the economy and change actions on pricing.
However, so far there are still no signs of a wider second-round effect. Wage growth and job demand are seen to be still balanced.
The second scenario is that if the direction of energy price movements is heavily influenced by carbon taxes and a green shift, there is a risk of pushing key inflation higher above targets.
Supply and demand imbalances are likely to remain protracted amid the shift and carbon prices are likely to rise further, which means the impact of rising energy and electricity prices could lead to higher consumer prices.
According to the latest estimates released last Friday, European inflation has risen to a record high of 5% in December, which is twice as high as the central bank’s target of 2%.
However, so far no tightening has been implemented by the ECB due to price pressures seen as only temporary.
