On Tuesday, September 1st, the European Central Bank's (ECB) monetary policy path is shifting as energy market volatility intensifies and inflationary pressures resurface in Europe. Market focus has shifted from the previous economic recovery to a balance between energy prices, inflation sustainability, and interest rate policy stability. Recent data shows a rebound in Eurozone inflation, with the market expecting August inflation to reach 3.3%, higher than the previous 2.9%. Meanwhile, conflict in the Middle East has increased energy transportation risks, pushing international crude oil prices back above $90 per barrel, up about 13% from early August and about 25% from pre-conflict levels. Against this backdrop, the ECB's focus on inflation risks has clearly intensified. Finnish central bank governor Olli Rehn recently stated that the ECB cannot be complacent about energy price-driven inflationary pressures and needs to guard against the long-term impact of rising energy costs. He believes that the current uncertainty facing the European economy is increasing, requiring policy-making to be cautious and based on subsequent data. Market expectations for future ECB policy adjustments are being repriced. The ECB has already raised interest rates due to the energy shock; if inflation remains high, the possibility of further tightening remains. However, policy space is also constrained by economic growth pressures, and the European Central Bank needs to avoid the high-interest-rate environment from having an excessive impact on corporate investment and household consumption.

Energy prices have become a key variable, and inflation risks in Europe have returned to the core of policy.

Over the past year, European inflation has undergone significant changes. Lower energy prices initially helped reduce inflation rapidly, but recent energy supply risks have once again become a major market concern. Due to disruptions to key shipping routes, risk premiums in the crude oil and natural gas markets have widened again, and rising energy prices are being transmitted to a wider range of sectors through production and transportation costs. For the European Central Bank (ECB), the biggest challenge posed by rising energy prices lies in their potential to alter inflation expectations. If businesses believe energy costs will remain high in the long term, they may further adjust prices for goods and services; if the labor market simultaneously experiences wage increases, a more persistent inflationary environment could emerge. Ollie Rehn points out that no clear price-wage spiral has yet been observed, meaning the European economy is not currently experiencing a typical price-wage spiral. However, he also emphasizes that policymakers underestimated some risks during past major inflationary shocks, therefore the ECB is currently more cautious in its forecasting. From a monetary policy perspective, rising energy prices do not necessarily mean the ECB will continue to tighten policy. The central bank needs to observe whether the energy price increases are sustainable and whether they affect core inflation. If energy prices fluctuate only in the short term, policy responses may be relatively limited; however, if energy costs remain high for an extended period, it may push policies to remain tight.

ECB's policy stance shift: from growth concerns to inflation prevention

It is noteworthy that Olli Rehn, who previously focused more on economic growth risks, has recently placed a significantly greater emphasis on inflation risks. This shift indicates a change in the internal discussions within the European Central Bank (ECB) regarding future policy direction. ECB Executive Board member Isabelle Schnabel has also previously expressed support for further adjustments to interest rate policy. Several policymakers are beginning to emphasize that the biggest risk is not simply weak economic growth, but rather that an energy shock could cause inflation to deviate from the target level again. Market data shows that investors have high expectations for further interest rate hikes at the ECB's next meeting. If policy adjustments are implemented, deposit rates could reach relatively high levels in recent years. At the same time, the market also anticipates further room for adjustment in the coming months. However, ECB officials generally emphasize that policy needs to rely on data. Rehn stated that future decisions will be made through a "meeting-by-meeting assessment" approach, meaning the central bank will not lock in a long-term policy path in advance, but will adjust based on changes in inflation, growth, and financial conditions.

The European market faces a complex environment, characterized by both economic resilience and policy pressures.

Despite rising energy prices increasing economic pressure, the European economy has not experienced the significant slowdown previously feared by the market. Olli Rehn stated that recent data shows the Eurozone economy is demonstrating resilience, and the Bank of Finland may even raise its 2026 economic growth forecast. Currently, Finland's economic growth forecast was previously around 0.7%, but Rehn believes future growth could reach around 1.5% to 2%. He views the Finnish economy as a microcosm of the Eurozone's economic structure, emphasizing the significant impact of export industries, particularly the German economy, on the overall European recovery. From a market perspective, the European economy currently faces a typical "double pressure": on the one hand, rising energy prices may drive inflation, prompting central banks to maintain a high-interest-rate environment; on the other hand, high interest rates may limit the speed of economic recovery. This policy environment increases the difficulty of market judgment. Going forward, the European financial market will focus on three areas: whether energy prices will remain high, whether core inflation will strengthen again, and whether economic growth can withstand high financing costs.