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ECB's Olli Rehn Highlights Energy and AI Risks Amid Uncertain Rate Outlook
Olli Rehn, a member of the European Central Bank (ECB) governing council, expressed concerns regarding the central bank's policy balance in light of rising energy prices and uncertainties surrounding artificial intelligence (AI). He indicated that higher energy costs could push inflation closer to the ECB's adverse scenario, which projects inflation to average 3.2% next year, compared to a baseline forecast of 3.0% for this year and 2.5% in 2027.
Rehn noted that the increase in long-term interest rates is likely to hinder economic growth, limiting the ability of firms to pass on energy price shocks to consumers. This situation places the ECB in a challenging position, as it faces inflationary pressures from energy while tighter financial conditions may be inadvertently tightening monetary policy.
Market expectations regarding future interest rate hikes have shifted significantly. While traders previously anticipated a 25 basis point increase by the end of the year, the likelihood of a rate hike in October is now estimated at around 27%, with December's hike probability at approximately 64%. The ECB continues to adopt a meeting-by-meeting approach, suggesting that it may benefit from waiting until December to assess the broader impact of energy prices on inflation and wages.
Source: KLEA News