The European Central Bank may raise interest rates into next year as it attempts to dampen demand that is now increasingly adding to rocketing inflation, chief economist Philip Lane has said.
With inflation approaching double digits, the ECB delivered two large rate hikes in July and September, with further hikes expected as even long term price growth expectations are now moving above its 2% target.
“We do think that this is going to dampen demand, we’re not going to pretend this is pain free,” Lane told a conference. “Demand is now a source of inflation pressure, it was not six or nine months ago in the same way it now is.”
At 0.75%, Lane said that the ECB’s deposit rate is still too low as it continues to stimulate the economy, meaning the bank’s job is not yet done.
Most economists agree that the neutral rate, where the ECB is neither stimulating nor holding back growth, is between 1.5% and 2%. Markets however see the top of the rate cycle higher and investors now price in rates just above 2.5% next spring.
Lane has long argued that the current inflation is primarily due to the shock caused by expensive energy prices. Monetary policy is largely powerless against such supply shocks so the ECB was among the last major central banks to hike rates.
But price growth has now broadened out and started to seep into all aspects of life while robust consumer demand is also driving prices.