ECB Economist Says Energy Surge May Limit Rate Hike Need

The European Central Bank's chief economist, Philip Lane, warned that the recent surge in energy prices could slow economic growth, potentially reducing the need for further aggressive monetary policy tightening. Speaking at a conference on Monday, Lane noted that while inflation remains a concern, the 'demand destruction' caused by high energy costs could temper the ECB's need to raise interest rates further.

The ECB has already raised interest rates twice this summer, with markets expecting two to three more hikes in the coming year due to fears of second-round price effects. However, Lane pointed out that underlying inflation indicators do not yet suggest a sustained upward shift in medium-term inflation. He acknowledged that growth has been resilient, partly due to government spending and AI investment, but cautioned that high energy costs pose risks to both inflation and growth.

'This second wave of the energy supply shock poses direct upside risks to the inflation outlook but also downside risks to the growth outlook,' Lane said. He added that while government spending has insulated the economy, the fiscal impulse is expected to decline in the coming years, adding to the drag on growth. Lane emphasized that the ECB remains on a 'middle path' for monetary policy, where a measured response is appropriate to keep inflation in check.