Välimäki Says Energy Shock Raises Euro-Area Inflation Risks

Bank of Finland Board Member Tuomas Välimäki said an energy shock has raised euro-area inflation risks, while limited evidence of spillover into wages and underlying inflation leaves the European Central Bank’s return to 2% less certain.

Euro-area HICP inflation rose to 3.8% year over year in September from 3.2% in August. Energy inflation reached 18.9% year over year that month, adding to the challenge of bringing inflation back to the ECB’s 2% medium-term objective.

Välimäki described underlying inflation as broadly stable. He said wages had not materially responded to the energy shock and medium- and longer-term inflation expectations remained anchored. Those assessments indicate limited evidence so far of the shock spreading beyond energy prices.

“Markets have to price a path every day. Central banks do not,” Välimäki said in a dinner speech in Helsinki on Nov. 2. He said higher energy costs reduce households’ purchasing power and raise firms’ expenses, weighing on activity even as energy prices add to inflation.

Välimäki also pointed to tighter financing conditions and weaker consumer confidence as drags on growth. AI-related investment, digitalization and public spending on infrastructure and defense were supporting economic activity, he said.

The ECB held its deposit rate at 2.50%, main refinancing rate at 2.65% and marginal lending rate at 2.90% on Oct. 29. Its Governing Council cited upside risks to inflation and downside risks to growth from the energy shock, and said it would set rates based on incoming data without committing to a particular path. The remarks come amid recent comments that an ECB rate hike could come at the next meeting.

Preliminary figures showed euro-area GDP grew 0.4% quarter over quarter in the third quarter, down from 0.6% in the second quarter. The estimates are subject to revision. Välimäki said the ECB’s December meeting would bring new projections, additional inflation and wage data, and more evidence on the energy shock.