ECB chief economist talks about additional price hikes to manage inflation

“We are fully aware that more ground is needed in upcoming meetings to get out of the highly accommodative level,” said Phillip Lane.

Chief Economist at the European Central Bank (ECB), Philip Lanesaid this Tuesday, 11th, that, in the next meetings, the institution intends to raise interest rates to levels that ensure the timely return of the inflation to the medium-term target of 2%.

“We are fully aware that more ground is needed in upcoming meetings to get out of the highly accommodative level. We expect to raise interest rates further to dampen demand and protect against the risks of a persistent rise in inflation expectations.” Société Générale.

Furthermore, according to Lane, when calibrating future monetary policy decisions, it will be essential to closely monitor the impact at different stages of the transmission mechanism. In order to identify the appropriate level of interest rate hikes, he also highlights that a number of factors must be considered, as changes in interest rates directly affect the liquidity and strength of companies’ balance sheets.

“In one direction, if we see that transmission is weaker or slower than expected, that would require further tightening of monetary policy stance. In the other direction, if we see that transmission is stronger or faster than expected, that would require a less restrictive monetary policy stance,” she explained.

However, the central banker commented that monetary policy cannot bring inflation back to target in the short term. “Market indicators suggest that inflation will return to levels consistent with our target throughout 2024, while remaining high next year,” he said.

Despite this, he assured that the ECB does not have “widely de-anchored medium-term inflation expectations”. “It is an essential task for monetary policy to ensure that this continues,” he added.

Incorporate repercussions of international monetary policy

The ECB’s chief economist also highlighted that the institution needs to incorporate the repercussions of international monetary policy, “due to the deeply integrated nature of the global economy”.

The central banker explains that there is a “prominent” role for the tightening of US monetary policy in driving the rise in eurozone rates, the correction in the bloc’s stock markets and the recent depreciation of the euro.

“Indeed, the fallout from US monetary policy had at least as much impact on euro area asset prices and the interest rate euro-dollar exchange in the last 12 months as the monetary policy actions of the ECB”, he highlighted.

According to Lane, the Fed’s tightening has major contractionary effects on real activity and, eventually, on inflation in the euro zone. “These contractionary effects are, in fact, as large as the domestic effects in the United States,” she pointed out.

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