By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Gabriel Makhlouf said Tuesday that last week’s rate hike was necessary to prevent energy-driven inflation from becoming embedded, but did not automatically signal the start of an extended tightening cycle.

“It does not automatically mean we are embarking on a new extended tightening cycle equivalent to 2022 and 2023”, Makhlouf, who heads the Central Bank of Ireland, said in a speech at the European Chamber of Ireland.

“The context is different, the starting point is different, and the calibration should be different”, he said. Still, supply shocks could not “simply be accommodated when they risk being persistent and when expectations are as sensitive as the data suggest they currently are.”

The direct effects of the energy shock had already appeared in consumer prices, while indirect effects were starting to emerge, Makhlouf said. Euro area headline inflation rose to 3.2% in May from 3.0% in April and 1.9% in February, while energy inflation was close to 11%, he noted.

“All of this shows that the initial energy shock is spreading”, with upward price pressures broad-based across retail, services, industry and construction, he said.

Makhlouf said the current shock differed from the one that followed Russia’s invasion of Ukraine in 2022, given weaker demand, lower consumer confidence and hesitant private investment.

However, he said he was “wary of taking too much comfort from a ‘this time is different’ narrative”, citing incoming data showing clear upward price pressures and the risk of longer-term energy supply disruption.

Inflation expectations remained a key channel to watch, he said. Euro area consumers’ 12-month inflation expectations rose from just over 2.5% to 4% in March and had remained there since, while medium-term expectations had been more stable, he said.

Makhlouf welcomed news of a proposed memorandum of understanding to end the war, but said “an end to the conflict does not necessarily mean an immediate end to the shock.”

The balance of risks in the staff projections showed that a June rate increase “was the right approach to bring inflation back to our 2% target over the medium term”, he said.

“It remains to be seen how quickly supply chains normalize and energy prices adjust”, he said. “So, despite the recent and relatively positive news, we really need clarity around energy supply.”

Until then, Makhlouf said he would continue to monitor the pass-through of the shock, focusing on indirect and second-round effects.