PARIS, June 19 (Reuters) – The euro zone economy is in the midst of a mid-sized inflation shock, with inflation holding above 3% for the rest of the year, a situation that requires a “measured” policy response, European Central Bank Chief Economist Philip Lane said on Friday.
The ECB raised interest rates last week to temper price growth expectations, and financial investors are now trying to guess if and when the bank will move again.
Lane described the current inflationary environment as a classic, textbook situation, in contrast to the pandemic inflation shock seen in 2021/22 or the ultra-low inflation period following the bloc’s debt crisis.
“It’s kind of a not too big, not too persistent (shock), but you respond with monetary policy in a measured way. That if you like is maybe where we are now,” Lane told an event hosted by Natixis. “We’re not so far in that big (inflation) dislocation scenario.”
Still, Lane said that even if the Middle East conflict eases, quite a bit of inflation damage has already been done and price growth will be above its 2% target into next year, justifying policy action.
“We’ve seen some improvement this week, (but) there’s enough cost increases in the pipeline that we think inflation will be above 3% (for) the rest of this year,” he said.
This will have a knock-on effect on other prices and will likely put upward pressure on wages next year, he said.
MARKETS PRICE IN NEXT RATE HIKE
Financial markets now see between one and two more hikes in the ECB’s 2.25% deposit rate, with the next move fully priced in by October.
The ECB earlier estimated that the neutral interest rate – the level that neither stimulates nor brakes growth – is between 1.75% and 2.50%, so another hike would put the deposit rate at the top end of estimates.
High energy costs will also be a drag on economic growth, but there is plenty of resilience in the pipeline so that overall growth will not be too far below the bloc’s potential, Lane added.
Households have ample savings to maintain consumption, investments are rising, primarily on AI and increased defence needs, and the financial system is profitable with plenty of liquidity, Lane said.
(Reporting by Mathieu Rosemain;Writing by Balazs Koranyi;Editing by Helen Popper)
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