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Philip Lane, chief economist of the European Central Bank.
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Philip Lane, chief economist of the European Central Bank, warned markets on Tuesday against pricing in rate cuts over the next two years.
Earlier this month, the ECB raised its key interest rate by 25 basis points to 3.5%, the latest in a series of hikes since July 2022, as policymakers aim to reel in record high inflation in the eurozone.
Headline inflation across the bloc was 6.1% year on year in May, down from 7% in the previous month. Core inflation, excluding volatile food and energy prices, was 5.3% year on year. Both remained well above the ECB’s 2% target.
Speaking to CNBC’s Annette Weisbach at the meeting of Portugal’s Sintra central bank on Tuesday, the former governor of the Central Bank of Ireland said the eurozone economy is in an “adjustment phase” as higher rates feed through and wages are trying to catch up with price increases.
“Where I think the market needs to ask itself questions is about the timing or speed of reversal of restrictive policies,” Lane said.
“We’re not going to go back to 2% for years to come. We’ll make good progress even this year, especially in the latter part of the year, but it’s not going to collapse to 2% in a few months.”
His comments echoed those of ECB President Christine Lagarde, who said in a keynote address on Tuesday that the central bank had made “significant progress” but “cannot yet declare victory”.
The ECB has raised interest rates by 400 basis points since July 2022. Markets have priced in another 25 basis points hike next month and are considering a further hike in September, but some economists have speculated that the ECB may need to reverse its monetary tightening. while higher rates push the Eurozone economy in the opposite direction.
Earlier this month, the US Federal Reserve opted to pause its rate hike cycle and leave its target interest rate unchanged. It struck an aggressive tone ahead of two further increases this year.
Lane suggested that policymakers should stay the course and keep monetary conditions restrictive for some time.
“We will have an ongoing period where rates need to remain restrictive to make sure we don’t have another shock that takes us away from 2% and sustainability of restrictiveness is very important,” he said.
“When I look at the horizon for the next couple of years, I don’t see any rapid rate cuts, so I don’t think it’s appropriate to expect rapid rate cuts in the price.”
The ECB’s chief economist warns markets against pricing in rate cuts over the next two years
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