ECB Aims for Gradual Return to 2% Inflation Target Amid Medium-Sized Shock

The European Central Bank (ECB) is facing a medium-sized inflation shock that requires some policy action, according to ECB chief economist Philip Lane. The bank left interest rates unchanged on Thursday but hinted at further tightening in September.

Lane said the ECB aims to guide inflation back to 2% from its current level of 3% over the next year or so. However, he warned that the central bank will closely watch for second-round price effects from surging energy costs, which could perpetuate inflation.

The ECB has not seen such effects yet but believes they are more likely to occur as long as high energy prices persist. Lane emphasized that the current inflation overshoot is still a moderate shock, requiring a measured response from the central bank.