ECB Economist Lane Says Energy Surge May Limit Rate Hike Need

European Central Bank (ECB) chief economist Philip Lane warned that the recent surge in energy costs could slow economic growth, potentially reducing the need for aggressive ECB rate hikes. Lane noted that such 'demand destruction' episodes can ease pressure on central banks to tighten policy to combat inflation.

The ECB has already raised interest rates twice this summer, with markets expecting two to three more hikes in the coming year due to concerns over second-round price effects. Lane emphasized that underlying inflation indicators do not suggest a sustained upward shift in medium-term inflation, though growth has remained surprisingly resilient thanks to government spending and AI investments.

High energy costs pose both inflation and growth risks, Lane said at a conference on Monday. He explained that while government spending has cushioned the economy, fiscal support is expected to decline in the coming years, adding to growth challenges. This balance between inflation and growth risks keeps the ECB on a 'middle path,' where a measured monetary policy response remains appropriate.