'Greenflation' fears are a twin threat to the EUs monetary and climate credibility

In a speech last weekend, European Central Bank economist Isabel Schnabel outlined that while the zero carbon energy transition is necessary, it is likely to prove inflationary, and price increases will be far from transitory.

Schnabel words were little surprise to many energy and commodity market veterans. Industry analysts have been increasingly vocal in outlining how curtailing supply while little is done to demand will inevitably result in higher prices. However, Schnabel words, coming from an influential member of the ECB executive board represents a sea change in narrative from European officials.

Central banks face the challenge of trying to ensure that current high levels of inflation don’t feed through into higher inflation expectations, while at the same time ensuring that higher interest rates do not snuff out an economic recovery before its even begun. Meanwhile, governments are increasingly wary of the negative impact of high energy prices, and the costs of climate related policies on the lowest income in society while at the same time ensuring there is no backtracking on climate commitments.

The intersection of economic and climate policies means a delicate balance will need to be struck over the next few months and possibly well beyond. Any misstep potentially threatens either the credibility of the EU’s monetary policy, its climate policy, or in the worse case, both.