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European Central Bank Vice President Luis de Guindos urged “determined action” to combat record inflation, maintaining officials’ calls for further increases in interest rates after last week’s historic hike.

While conceding that soaring energy costs are the main cause of the spike in consumer prices, and that the 19-member euro zone -- tipped by some economists to slip into a recession -- faces a “challenging outlook,” Guindos said demand is also playing a role. 

“It is true that we are not in a classic demand-driven overheating episode, and that energy remains the dominant driver of rising inflation,” Guindos said Thursday. “But at the current low level of interest rates, monetary policy is still accommodative, thus supporting demand and ultimately also contributing to price pressures.”

“Determined action is essential to keep inflation expectations anchored, which in itself contributes to delivering price stability and avoids second-round effects in inflation,” he said in a speech in Lisbon.

The ECB is battling inflation that’s nearing five times its 2% target, while also bracing for a weaker economy during the winter after Russia slashed natural gas deliveries in protest at sanctions over its war in Ukraine.

Right now, curbing prices is taking priority, with the Federal Reserve’s aggressive hikes in the US reinforcing the hawkish approach. The ECB said last week that it expects to boost rates further “to dampen demand.” 

Speaking separately in Dublin, Ireland’s Gabriel Makhlouf echoed Guindos’s tough tone.

“A pivot to further tighten monetary policy has been necessary, as history has taught us that these issues will only be exacerbated if we delay action,” he said Thursday. “Raising interest rates is absolutely necessary as persistent inflation is damaging to macroeconomic stability and the community’s longer-term living standards.”

There have been some calls for restraint. Chief Economist Philip Lane this week signaled that future hikes may be smaller, while calling the recent jumbo move “appropriate.”

Also speaking Thursday in Lisbon, Portuguese central bank chief Mario Centeno reiterated recent remarks that monetary policy should be predictable and move in small steps. He sees no sign of inflation expectations becoming unmoored and said price gains will ease. 

“The effects of the unprecedented supply shocks will dissipate,” Centeno said.

One factor that looks set to endure, however, is the euro. Its depreciation adds to inflationary pressures, according to Guindos, with the slide to below parity against the dollar making commodities imports more expensive.

That decline is partly down to the faster pace at which the Fed has lifted rates but also due to Europe’s deteriorating outlook. Guindos said economic growth is expected to “slow down substantially,” though didn’t mention a downturn.

(Updates with ECB’s Centeno starting in 10th paragraph.)

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