ECB Economist Says Energy Costs and Higher Rates May Limit Rate Hikes

European Central Bank (ECB) chief economist Philip R. Lane highlighted that surging energy costs, higher borrowing rates, and reduced government support could slow economic growth, potentially limiting the need for further ECB policy tightening. Speaking at a conference in Frankfurt, Lane noted that while recent energy price spikes pose an inflation risk, other factors are acting as a drag on the economy. High energy costs, diminished fiscal support, and rising market-based borrowing costs are all expected to curb demand and growth. Lane emphasized that the ECB's measured approach to inflation remains appropriate, given these counterbalancing effects.

Lane also pointed out that while growth has been resilient this year, fiscal policies are projected to shift from positive in 2026 to negative in 2027 and 2028. Additionally, the recent surge in long-term interest rates is expected to slow growth more than previously anticipated. The jump in AI-related investments is a positive for the economy, but Lane warned that heavy borrowing by tech companies to fund these investments is adding upward pressure on interest rates. These 'demand destruction' factors could reduce the need for aggressive monetary policy adjustments to bring inflation back to the 2% target.

Lane did not comment on the next policy move, stating that decisions will be made meeting by meeting. Financial markets currently expect another two to three rate hikes from the ECB in the coming year, although these expectations have been volatile. Bundesbank President Joachim Nagel supported Lane's view, noting that there are no clear signs of inflation feeding through to price and wage settings. However, Nagel also cautioned that risks to inflation remain tilted to the upside, with potential further increases in natural gas prices, refinery capacity issues, and upward pressure on food prices.