ECB’s Lane: Will Continue Hiking Rates Given Energy Prices, Wage Growth and Exchange Rate

14 September 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will need to continue hiking interest rates in the context of higher energy prices, faster wage growth and a weaker euro, ECB Chief Economist Philip Lane said Wednesday.

In remarks at a meeting of the ECB’s Money Market Contact Group, Lane said that the transition from highly accommodative policy to a stance that will safeguard price stability, frontloaded by last week’s 75bp rate hike, ‘will require us to continue to raise interest rates over the next several meetings.’

‘This policy path will dampen demand and guard against the risk of a persistent upward shift in inflation expectations’, he said.

Decisions would be data-driven and made meeting by meeting, he said.

The latest upward revisions to the staff inflation forecasts should be seen in the context of expected higher prices for gas and electricity, but more rapid wage growth ‘is also a significant contributor to higher and more persistent inflation, while exchange rate depreciation has also added to price pressures’, he said.

Still, core inflation would decline from mid-2023, he said, and longer-term inflation expectations point to around 2%, though recent increases in some measures of these require watching.

Given the persistence of significantly above-target inflation, largely upside risks and the very accommodative level of interest rates, ‘it was appropriate to take a major step that frontloads the transition from the prevailing highly-accommodative level of policy rates towards levels that will support a timely return of inflation to our target’, he said.

Reiterating his August 29 assertion, Lane said that ‘in calibrating a multi-step transition path, the appropriate size of an individual increment will be larger, the wider the gap to the terminal rate and the more skewed the risks to the inflation target.’

However, he insisted that policy reflect the fact that inflation is being driven by an energy price shock and that its dynamics are thus ‘of a different nature compared to demand-driven overheating dynamics.’