ECB Economist Suggests Growth Drags May Limit Rate Hike Need

European Central Bank (ECB) Chief Economist Philip Lane suggested that economic growth may limit the need for further aggressive policy tightening. He cited surging energy costs, higher borrowing rates, and shrinking budget support as factors that could weigh on growth and curb inflationary pressures. Lane emphasized that while energy prices are pushing inflation higher, these other factors are acting as a drag on demand, making a 'measured' response appropriate.

Lane noted that growth has been resilient this year, but fiscal support is expected to turn negative in 2027 and 2028. Additionally, the recent surge in long-term interest rates will likely slow growth more than previously projected. He also highlighted that heavy borrowing by tech companies for AI investments is adding upward pressure on interest rates, which could further impact economic activity.

Despite market expectations of two to three more rate hikes in the coming year, Lane did not comment on the next policy move, stating that decisions will be taken meeting by meeting. Bundesbank President Joachim Nagel echoed Lane's views, noting that there are no clear signs of inflation feeding through to wages and prices, but warned that risks to inflation remain tilted to the upside due to factors like natural gas prices and food costs.