ECB Chief Economist Says No Pre-Set Path for Further Rate Hikes

The European Central Bank (ECB) may not need to raise interest rates again soon to control inflation, according to chief economist Philip Lane. While the bank increased rates from 2% to 2.5% between June and September in response to the energy-supply shock, Lane emphasized that the ECB is now on a “middle path” for monetary policy, where a measured approach is key to managing inflation.

Lane noted that factors beyond energy prices, such as fiscal policy and artificial intelligence (AI), are influencing inflation in the euro area. He highlighted that growth has been strong this year, but fiscal stimulus is expected to turn negative in 2027 and 2028, which will slow growth and reduce the impact of earlier rate hikes. The recent surge in oil and gas prices, described as a “second wave” of the energy-supply shock, poses risks to both inflation and growth.

Fiscal policy is currently boosting economic activity, particularly due to defense spending in Germany and infrastructure programs under the Next Generation EU initiative. However, ECB staff predict fiscal tightening of 0.4 percentage points in 2024 and 0.2 percentage points in 2028, which will act as a headwind to economic activity. Lane also observed that while the euro area is benefiting from the global AI boom, its impact is smaller compared to the US or East Asia, and thus has a limited effect on wage dynamics and inflation.

The information from futures markets suggests that the decline in oil and gas prices next year and in 2028 will be less steep than previously expected. Lane concluded that the ECB’s monetary policy must consider multiple factors, not just the energy-supply shock, to effectively manage inflation.