ECB’s Lane says further rate hikes remain justified even under milder outlook
- Philip Lane says further ECB rate hikes remain justified even under a milder economic scenario.
- The ECB could look through temporary shocks if they are not expected to have a lasting impact on inflation.
- Lane warns that food prices are likely to keep rising despite lower Oil prices.
The European Central Bank (ECB) remains committed to maintaining a restrictive monetary policy stance in order to contain the inflationary impact of the energy shock, even under a milder economic scenario, according to Chief Economist Philip Lane comments reported by Reuters. Lane stated that further rate hikes still make sense, while emphasizing that the ECB could be willing to look through temporary shocks if they are not long-lasting.
Key takeaways
Comfortable that hiking makes sense even under milder scenario.
Open minded to looking through shocks if they are not long lived.
Even if Oil is falling, we think food will keep going up.
Hike aims to contain spread of energy shock.
Market reaction
Markets have largely ignored Lane’s remarks, with EUR/USD trading around 1.1470 at the time of writing on Thursday, down 0.28% on the day.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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