ECB's Lane Warns Energy Costs Could Slow Growth and Reduce Rate Hike Needs

European Central Bank (ECB) chief economist Philip Lane warned that rising energy costs could slow economic growth and reduce the need for aggressive interest rate hikes. Speaking at a conference on Monday, Lane noted that while underlying inflation measures do not show a sustained upward trend, the recent surge in energy prices poses risks to both inflation and growth.

The ECB has already raised interest rates twice this summer, with markets anticipating two or three more increases in the coming year. Lane emphasized that the second wave of the energy supply shock presents both upward inflation risks and downward growth risks. He suggested that demand destruction due to high energy costs could lessen the need for the ECB to tighten monetary policy to control inflation.

Government spending and investment in artificial intelligence have partially shielded the economy from slower growth. However, Lane pointed out that the fiscal impulse is expected to weaken in the coming years, exacerbating the drag on economic expansion. He concluded that the ECB is maintaining a balanced approach to monetary policy, aiming to keep inflation under control without over-tightening.