European Central Bank (ECB) chief economist Philip Lane has warned that the inflationary squeeze on households from rising energy prices is likely to get worse in the coming months.
He predicted inflation across the euro zone would rise to at least 3.6 per cent by the end of the year while describing the ECB’s latest interest rate increase as a “measured adjustment to a significant inflation issue”.
His comments will be interpreted as leaving the door open for another ECB rate hike before Christmas.
Financial markets are pricing in one more rate increase this year, followed by one or two moves next year.
Speaking at the Dublin Economics Workshop event in Wexford, Lane described the ECB’s latest rate move as “a straight-forward decision given this inflation pressure and given the wider resilience of the European economy”.
The ECB lifted interest rates by a quarter point (0.25 per cent) on Thursday, following a similar move in June, as the energy shock from the Iran war pushed price growth across the bloc to a four-month high of 3.3 per cent.
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Asked if he was surprised by the recent spike in oil prices, Lane said: “We take the energy market as it comes along.”
“What we have seen, compared to before the war, there have been waves. There was a big increase in oil and gas (prices) in initial couple of months.
“Then there is a degree of optimism with the memorandum of understanding, but then more recently, everyone is looking at all of these different military strikes, different military interventions in the Gulf, there is upward pressure (on prices) now,” he said.
Lane said the ECB, in making its decision on rates, does not just look at the most recent data point “we try and look outwards, and try and assess where the energy market is going to go over the next couple of years”.
“In making our decision yesterday, energy was at the centre of the decision . . . but the big issue is high prices compared to last February before the war, and not the to and fro of this week or the week before,” he said.
In terms of governments providing cost-of-living supports, Lane said governments “absolutely” do need to help people who are struggling.
But the measures needed to be tailored, temporary and targeted.
“Generalised support for a large part of the population that adds to demand in the economy and doesn’t help with the inflation issue,” he said.
The Irish Government has been criticised for providing energy credits to the entire population.
While ECB president Christine Lagarde has repeatedly insisted the bank is not on a predetermined rate path, ECB officials believe another hike as soon as next month is now possible given the renewed pressure on energy prices.
Policymakers are battling an increase in consumer-price inflation which rose above 3 per cent last month, an increase that is unlikely to recede in the months ahead.
Lagarde said the latest hike was “a no-brainer” that was decided unanimously.