European Central Bank chief economist Philip Lane said several forces weighing on eurozone growth could limit how much further monetary tightening is needed. Higher energy costs, rising market yields and reduced fiscal support were all likely to restrain demand, he said. Lane maintained that a measured policy response to the inflation shock remained appropriate.
The ECB raised interest rates twice during the summer as inflation moved to nearly twice its 2% target. Policymakers are assessing how persistent the energy-driven price surge will be and whether it will influence broader wage and price setting. Lane said decisions would continue to be made meeting by meeting and did not signal the next move.
WEAKER DEMAND COULD CONTAIN SECOND-ROUND PRESSURES
Lane said the energy shock reduces households' real incomes and company profits in an economy that imports much of its energy. Higher long-term borrowing costs also slow investment and consumption, while the eurozone's fiscal impulse is projected to turn negative in 2027 and 2028. Those channels could reduce the monetary adjustment required to return inflation to target.
His assessment did not dismiss the inflation risk. Lane described the recent energy-price increase as a clear upside threat and said a persistent deviation from target would require a response. The policy question is how the immediate price shock interacts with weaker demand over the medium term.
MARKET EXPECTATIONS REMAIN VOLATILE
Financial markets were pricing two to three further ECB rate increases over the coming year, Reuters reported, although those expectations had shifted sharply within days. Bundesbank President Joachim Nagel separately said longer-term inflation expectations remained consistent with the 2% target. He nevertheless warned that energy and food prices could keep risks tilted upwards.
The next ECB meeting and incoming wage and inflation data will test whether weaker demand is offsetting the energy shock. A further rise is not assured by Lane's remarks, and the timing will depend on evidence of persistence and second-round effects. Market pricing therefore remains more aggressive than the guidance he provided.