ECB’s Lane: Rise in long-term rates will slow growth

European Central Bank (ECB) Chief Economist Philip Lane warns of moderate economic growth due to higher long-term rates. Regarding inflation, Lane said that medium-term inflation expectations are still de-anchored.

Comments

Rise in long-term rates will slow growth and reduce pass-through by more than projected.

Underlying inflation indicators indicate that an upward shift in medium-term inflation has not taken hold.

We remain in the 'middle path' for monetary policy, measured response is appropriate.

Demand destruction channels of high energy costs can limit the required adjustment of ECB rates.

Second wave of the energy supply shock poses direct upside risks to the inflation, downside risks to the growth.

Market reaction

No immediate reaction is seen in the Euro (EUR) following remarks from ECB's Lane. At press time, EUR/USD is down 0.5% slightly below 1.1200 due to French fiscal concerns.

Lane flags growth drag from higher yields but sticks to middle-path stance

ECB’s Lane scores 4.6/10 on FXS Speechtracker, below the historic 5.3/10 baseline, signaling a slightly more cautious tone. The emphasis that the rise in long-term rates will slow growth and reduce pass-through more than projected, alongside demand destruction from high energy costs limiting the required adjustment of ECB rates, leans modestly dovish for the Euro.

Lane’s remark that underlying inflation indicators show no firm upward shift in medium-term inflation reinforces this measured stance. However, the warning that a second wave of the energy supply shock brings upside risks to inflation and downside risks to growth keeps the Euro sensitive to data, supporting expectations for a cautious but flexible policy path rather than an aggressive tightening cycle.