Policies to tackle climate change could keep energy prices high for longer and could force the European Central Bank to withdraw stimulus sooner than planned, one executive warned.

Isabel Schnabel, the ECB’s executive for market operations, said the planned transition from fossil fuels to a greener, low-carbon economy “poses a measurable upside risk to our baseline forecast for medium-term inflation”.

A sharp surge in energy prices pushed inflation to 5% in December after the economy rebounded from the impact of the coronavirus pandemic, record high for the euro area. But the ECB predicted that energy prices would subside and pledged to keep its ultra-easy monetary policy in place for at least another year.

However, Schnabel said the inflationary impact of the green energy transition could force the central bank to reconsider this stance, Speaking Video link to Saturday’s annual meeting of the American Finance Association.

“In some cases, central banks will need to break the prevailing consensus that monetary policy should ensure price stability in the medium term through rising energy prices,” Schnabel said.

Energy prices in the 19 euro zone countries rose 26% year-on-year in December, close to a record high set last month.Natural gas prices hit record high Last year, wholesale electricity prices in the region pushed up to 196 euros per megawatt-hour in November — almost four times the pre-pandemic average — the ECB executive said.

“While in the past energy prices have typically fallen as they rose, the need to intensify the fight against climate change may mean that fossil fuel prices now not only have to stay high, but they must even continue to rise if we are to reach the Paris climate. goals of the agreement,” Schnabel said.

The German economics professor, who joined the ECB board two years ago, has become the most vocal critic One of the executives of its sprawling bond-buying program, which has acquired a 470-million-euro portfolio of assets since it was launched seven years ago.

Last month, the ECB responded to concerns about rapidly rising prices by announcing a “gradual” reduction in asset purchases from 90 billion euros a month last year to 20 billion euros a month in October.But other central banks – including the Fed and the Bank of England – are tightening policy faster, critics say ECB should do the same thing.

Schnabel outlined “two situations in which monetary policy needs to change course”. One is whether the continued rise in energy prices has led to consumer expectations that inflation will remain high and contributed to the wage price spiral of the 1970s. But she said wages and union demands “remain relatively modest” “so far”.

The second is if policies to combat climate change, such as carbon taxes and measures to compensate poor households for higher energy costs, end up increasing inflationary pressures — as recent research suggests already happening — she said.

ECB chief Philippe Ryan appears to disagree.he Tell Irish broadcaster RTE said on Friday that while rising energy prices were “a major concern”, there was “minor upside this year” and he believed “there will be a shift in supply and the overall pressure should ease this year”.

Like most central banks, ECB surprised by sustained upside price pressureLast month, it sharply raised its euro zone inflation forecast to 3.2% this year, while forecasting it will fall back below its 2% target next year.

But Schnabel said that assumption “from the futures curve” suggests energy prices will not contribute to headline inflation over the next two years, adding that “these estimates are likely to be conservative.” She said that if oil prices remained at their November 2021 levels, the ECB would be sufficient to hit its inflation target in 2024.