If Financial Instability Turns Out To Be Limited, ECB Will Continue to Hike: Lane

29 March 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane said on Wednesday that if financial stress remained limited, more rate hikes would be necessary to bring down inflation in the Eurozone.

In an interview with German weekly Die Zeit, Lane, who is the ECB’s chief economist, said that current wage developments in the currency union did not look excessive, tempering fears of a wage-price spiral.

‘Under our baseline scenario, in order to make sure inflation comes down to 2%, more hikes will be needed’, he said. ‘That is absolutely our diagnosis.’

‘If the financial stress we see is non-zero, but turns out to be still fairly limited, interest rates will still need to go up. However, if the financial stress we talked about becomes stronger, then we’ll have to see what’s appropriate’, he said.

Rising wages ‘have not been an important source of inflation’ in the euro area, he said. Last year, ‘a lot of the price increases could be put down to increased profits and rising energy costs’, he said.

There would be a ‘handover’ from prices to wages this year, he predicted. ‘We expect wages to go up more quickly as unions react to the high inflation of last year’, he said, though a 1970s-style wage-price spiral was ‘not what we’re seeing’ in the Eurozone. The economy was experiencing ‘wage increases that are higher than normal, but in the grand scheme of things they look reasonably fair’, he said.

The risks to financial stability from the banking sector were, in his view, limited in the euro area. The macroeconomic outlook was ‘positive’, he said, and he did not expect ‘in the baseline […] to see the banking system come under significant pressure.’

‘I think it remains the case that there’s no direct read-across [from events in the US and Switzerland] to the euro area. In the baseline, we expect these tensions will settle down’, he said.

It was ‘possible’ that the ECB would achieve a soft landing, he said. ‘Some might object that it takes a recession to bring down inflation’, he said, but, he emphasised, the euro area was in ‘a very unusual situation’ following the pandemic and the energy crisis.

‘[I]t’s possible for the pandemic recovery to continue and for inflation to come down simultaneously’, he said.