By Marta Vilar – SINTRA, Portugal (Econostream) – European Central Bank Chief Economist Philip Lane said on Tuesday that second-round inflation effects would “probably take some time” to materialize, meaning the ECB should first focus on indirect effects and how recent energy price increases feed through into food and services inflation.
On the sidelines of the ECB Forum on Central Banking in Sintra, Portugal, Lane told Bloomberg TV that the ECB’s June rate increase had been “a robust decision”, adding that policymakers had assessed it even under a scenario involving a rapid decline in oil prices.
Rejecting the idea that June’s move had been an insurance hike, Lane said, “I would reserve the phrase ‘insurance hike’ to situations where there’s a tie breaker.”
Asked whether the ECB should raise rates in July or wait until September, Lane said that framing was “maybe overly narrow.”
Instead, policymakers should focus first on the indirect effects of the previous rise in energy prices, as second-round effects would emerge only with a lag.
“So, even though now fuel prices are falling, what we need to look at is how the four months of energy cost increases percolate into food inflation and into services inflation in particular,” he added.
The ECB would need to assess whether firms that had absorbed higher energy costs over recent months would pass those costs on to consumers or instead absorb them through lower profit margins.
“And only after that, can you start a kind of vision of how strong second round effects might be, which would be later this year and into next year,” he said.
Asked whether the ECB might not raise rates again at all, Lane reiterated that the Governing Council remained committed to its meeting-by-meeting approach and to “not boxing ourselves in by speculating about rate decisions.”
Instead, the ECB would continue to assess the available data at each meeting before deciding on the appropriate policy response, he said.
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