Europe Price Shock Is Still Long Way From 2022 Energy Crisis

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Most recently, it stood at 1.9%, slightly below the ECB’s 2% target, though underlying price pressures and wage growth are still a bit too high for officials’ comfort. 

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The global macroeconomic backdrop also differs notably, and Europe’s job situation is less acute than four years ago, according to Paul Hollingsworth, head of developed market economics at BNP Paribas Markets 360. 

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“Labor markets are tight, but are not overheating as they were back then,” he wrote in a report.

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Global fiscal policy, fueled by debt, was also geared toward inducing a snapback in prices and growth from the pandemic. Now, with the exception of Germany’s spending binge on infrastructure and defense, budgets are less expansionary.

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What Bloomberg Economics Says:

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“While our view continues to be that the Governing Council will be on hold for the rest of the year, we have removed the downside risks to the call that prevailed prior to the energy shock. That being said, this episode differs from the gas shock of 2022, so the ECB has no reason to deviate from a look-through approach — at least not yet.”

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—David Powell and Simona Delle Chiaie. For their ECB PREVIEW, click here

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Monetary-policy settings also contrast notably. The deposit rate in early 2022 was still negative at -0.5% — an ultra-loose setting designed to juice inflation. The benchmark is now at 2%, a level broadly seen as neither restricting nor stimulating the economy, meaning a limited tweak could already start braking price growth. 

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The central bank’s hands were also tied previously by its commitment to forward guidance that promised to stop ongoing large-scale asset purchases — quantitative easing — before considering increasing borrowing costs. That’s not the case now.

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“We can respond more quickly if necessary,” Slovak’s Governing Council member Peter Kazimir told Bloomberg earlier this week. “We have to be agile. We have also learned our lessons.”

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With the March 19 decision approaching, policymakers are stressing that the length of the war and the corresponding energy price surge will determine the impact, and are focusing on inflation expectations. Market-based longer-term indicators have risen, but are still well below peaks recorded in 2023.

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The last inflation episode has potentially changed sensitivities toward inflation, according to Klaas Knot, who led the Dutch central bank for 14 years through mid-2025 and is seen as a frontrunner to succeed Lagarde as ECB chief. 

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“If energy prices continue to be elevated, then this time around I do think that workers will be quick to try to get compensated,” he said, warning of the danger of “nonlinearities” and second and third-round effects. 

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Commenting in a Bruegel podcast, he highlighted that “if you think that that scenario is likely, then there is a limit to which you can look through the shock because then you have to respond.”

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While, the risk of a repeat of what followed Russia’s invasion of Ukraine seems limited, “it is not difficult to envisage a scenario in which energy prices rise much further,” said Jack Allen-Reynolds, deputy chief euro-zone economist at Capital Economics.

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In such a situation, not least given the memory of the Ukraine shock, policymakers including those at the ECB will be more open to respond, according to Stefan Gerlach, a former deputy governor of the Irish central bank.

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“Central banks will be much more on the ball this time,” said Gerlach, who is now chief economist at EFG Bank in Zurich. “No central bank governor will want to put 2022 on his resume.”

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—With assistance from James Hirai and Bastian Benrath-Wright.

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(Updates with Knot starting in 20th paragraph)

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