By This Hour Finance Desk

Rising energy prices have moved above the assumptions used in the European Central Bank’s latest projections, putting a sharper focus on how a renewed cost shock could affect inflation, household spending and growth across the euro area. Boris Vujčić, the ECB’s vice-president, said policymakers would assess the changing picture meeting by meeting rather than validate financial-market expectations for a succession of rate increases.

In an interview published by the ECB on 18 September, Vujčić described geopolitics as the principal source of substantial uncertainty around the outlook. His comments place energy at the centre of a difficult policy calculation: higher oil and gas prices can lift inflation, but a prolonged squeeze on real incomes can also restrain consumption and gross domestic product. The distinction matters because the ECB is weighing the full consequences of a shock, not merely its first effect on headline prices.

Markets, he said, had become highly sensitive to energy prices and were pricing several rate rises over the following 12 months. That is a reported market reaction rather than an ECB forecast, and Vujčić stressed that the central bank does not offer forward guidance. The message was deliberately conditional: market pricing is one input into financial conditions, but it is not a commitment by the Governing Council.

Energy shock presents opposing risks for inflation and demand

Vujčić said energy prices had continued to rise after the cut-off date for the ECB’s latest projections and had already increased during the period surrounding the Governing Council meeting. The earlier baseline had envisaged tensions in the Middle East easing and energy prices declining. Instead, the interview described a market view in which prices could stay higher for longer. That change, if sustained, would require policymakers to reconsider an outlook built on less expensive energy.

The vice-president differentiated between the routes through which oil and gas affect prices. Oil, in his account, tends to pass quickly into headline inflation through fuel. Gas can exert a more persistent effect, hitting household utility costs directly while raising costs for producers that may eventually be passed along supply chains. Neither channel can be read in isolation. A price rise that increases measured inflation can simultaneously weaken the spending capacity that supports activity.

That is why Vujčić pushed back against treating energy as the sole determinant of future policy. He said the ECB considers a broad range of data and criteria, rather than one commodity-driven indicator. If inflation remains elevated through the autumn and damages household incomes and consumer behaviour, he said, the eventual effect on GDP would be dampening. The policy problem is therefore not simply whether prices rise, but whether higher prices spread, endure and materially alter demand.

The approaching winter adds a practical source of uncertainty. The interview said European gas storage levels were lower than previously, while arguing that gas had become somewhat less important as the marginal influence on electricity prices than it had been. Vujčić said a harsh winter would have a larger adverse effect on real incomes and GDP than a mild one. He did not present a forecast for the weather; rather, he portrayed it as an uncertain condition that could change the economic impact of energy costs.

He attributed part of Europe’s adjustment to expanded renewable capacity and investment in energy efficiency. The interview cited an approximate 15% to 20% expansion in renewable capacity in recent years, alongside figures of 26% for renewables’ share of final energy consumption and 50% for their share of electricity consumption. Those figures were offered in the interview and should be treated as attributed estimates rather than independently established measurements in this report.

Food prices add a slower-moving complication

Energy was not the only inflation channel Vujčić identified. The ECB’s baseline projections, as cited in the interview, anticipate food inflation increasing gradually to 3.4% in the third quarter of 2027. The projected rise was linked in part to delayed effects of severe droughts in Europe during the summer. Agricultural disruption does not necessarily reach retail prices immediately, and the account emphasised the time needed for shocks to move through the supply chain.

Vujčić also described the global effects of El Niño as complex rather than directional. It may harm agricultural output in some places while benefiting it in others, he said. That framing leaves the food outlook conditional on developments that the interview did not quantify. It also illustrates why a central bank assessing inflation cannot rely on a single weather, energy or market variable to settle its policy judgment.

The 3.4% figure is a projection, not an observed outcome or a policy commitment. Its relevance lies in the ECB’s stated expectation that food-price pressure may build gradually even as other parts of the inflation picture shift. Whether the projected path holds will depend on incoming information, including how supply disruptions filter into prices and whether household purchasing power can absorb higher living costs.

Resilient activity may still face a purchasing-power test

For now, Vujčić said the euro-area economy had absorbed policy tightening and geopolitical shocks relatively well. He pointed to exports, potentially including exports brought forward in anticipation of changing conditions, and private consumption that had proved stronger than expected. He said a previously anticipated improvement in consumption had appeared in the latest data, possibly helped by a temporary dip in inflation.

That resilience does not remove the pressure from tighter financial conditions. Monetary-policy transmission works gradually, Vujčić said, but was already visible in higher mortgage and corporate lending rates compared with the beginning of the year. Bank funding costs had also increased, in part because bond yields were higher. These are the channels through which changes in policy rates and market yields can reach households and companies over time.

His central condition for continued strength in underlying consumer spending was that persistently higher prices do not substantially erode real purchasing power. That condition connects the inflation and growth sides of the outlook. Household consumption helped support activity in the account he gave, but it could become less supportive if prices continue to outpace what consumers can absorb.

Vujčić said the ECB had made two rate increases at projection meetings and that he saw merit, for the time being, in a gradual approach. Yet he did not attach that view to a defined level of rates or a future schedule. He rejected heavy reliance on labels such as neutral or restrictive, arguing that policymakers should judge the appropriate rate level for the circumstances rather than focus on terminology. Future decisions, he said, would follow incoming developments.

Bond yields, bank strength and new risks shape the wider assessment

The interview also addressed the rise in long-term sovereign yields, which Vujčić said had several causes. These included higher inflation expectations, revisions to pricing for the eventual policy-rate level, fiscal deficits and sovereign borrowing, corporate bond supply, and spillovers from rate adjustments at other major central banks. His explanation did not identify one decisive driver. Instead, it portrayed yields as reflecting a combination of domestic and international forces.

How market yields evolve will feed into the ECB’s reading of financial conditions and its policy stance, Vujčić said. He added that declining inflation expectations could lead to repricing over time, while describing responsible fiscal policy as an essential long-run element. That was an assessment of the forces affecting markets, not a forecast of bond yields or a recommendation for investors.

Vujčić said the recent yield increase did not create a financial-stability threat. He characterized European banks as well capitalised, liquid and profitable, and said their market valuations had improved relative to book value. At the same time, he named possible newer vulnerabilities: cybersecurity and operational risks associated with artificial intelligence, plus elevated equity valuations in concentrated technology sectors. The combination reflects a distinction between his relatively reassuring assessment of banks and his caution over risks that can develop elsewhere in the financial system.

On the ECB’s operational framework, Vujčić expressed support for the possible use of minimum reserve requirements to absorb part of the Eurosystem’s excess liquidity. He described the tool as straightforward and inexpensive, particularly after substantial liquidity had been created through asset purchases. But he declined to anticipate internal ECB discussions or set out a decision, leaving clear uncertainty over whether the institution will change its approach.

Market pricing is not a policy promise

The interview’s most immediate significance is its effort to separate market inference from central-bank intent. Vujčić acknowledged that markets must price assets and that energy prices had become a focal point for expectations around inflation, the rate path and the terminal rate. He did not endorse the implied sequence of increases. His repeated position was that the ECB will consider the wider data set at each meeting.

That leaves several questions unresolved: whether energy prices remain elevated, how winter conditions affect demand and energy use, whether drought-linked food inflation materialises as projected, and whether higher prices reduce real incomes enough to weaken consumption. It also leaves open how much of the increase in longer-term yields will persist and how the ECB’s discussion of reserve requirements will develop.

The ECB’s published interview is the primary documentation for Vujčić’s remarks and the projections he cited. However, the report has not been independently corroborated: the supplied material contains one source, and several numerical assertions in the interview have not been supported here by separate documentation. Readers should therefore distinguish the vice-president’s assessment, the ECB baseline projections and reported market pricing from confirmed future economic outcomes.

For further context on this subject, see ECB raises key rates by 25 basis points as inflation outlook stays above target.

Reporting notes

What is confirmed: Vujčić said policy decisions will be made meeting by meeting using a broad data set. The ECB interview is the primary document for those remarks.

Why this matters: His comments separate market-implied rate rises from ECB policy, highlighting the risk that energy inflation could also curb consumer demand.

What remains unclear: Energy prices, winter conditions, food-price pass-through, consumer purchasing power and any ECB decision on reserve requirements remain uncertain. This report is based on one source and has not been independently corroborated.

Sources