The European Central Bank will raise interest rates again in December and next year to fight inflation but those increases may well be smaller than the most recent ones, the bank’s chief economist Philip Lane said in an interview published on Monday.
With the inflation rate in double digits, the ECB has raised interest rates by 200 basis points in just three months from record low levels, and is set to mop up some of the trillion euros pumped into the financial system in recent years.
Lane suggested the next rate hike would be smaller than the record 75 basis-point-increases decided at the last two ECB meetings, but won’t be the last.
“One platform for considering a very large hike, such as 75 basis points, is no longer there,” MNI quoted Lane as saying. “The more you’ve already done on a cumulative basis, that changes the pros and cons of any given increment.”
He said the ECB was not about the pause its hiking cycle but “to move at the appropriate time to smaller increments” and reduce its bond holdings, the key part of its stimulus policy of the past decade, in a “more mechanical” fashion.
“I don’t think we’re going to be on a meeting-by-meeting basis interconnecting the interest rate decision with the pace (of bond reinvestments) for the next month or two,” Lane said. “It should be probably more mechanical than that.”
He hinted at higher inflation next year than the ECB was expecting in September, in light of more elevated energy prices and government deficits, while he said the outlook for 2024-25 was more mixed.
“For those years the forecast will have to balance the fact that inflation has a knock-on effect, for example, on the wage mechanism,” Lane said. “But on the other hand, we do have the fact that the financial conditions are far different than what we had going into the September forecast.”