FRANKFURT
European Central Bank Chief Economist Philip Lane said the late summer surge in energy costs represents a second wave of supply shock that could curb the central bank's need to tighten further, even as markets price in two to three additional rate increases over the coming year.
Lane noted that demand-destruction channels from elevated energy costs can limit the monetary tightening required to return inflation to target. "This second wave of the energy supply shock poses direct upside risks to the inflation outlook but also downside risks to the growth outlook," he said at a conference Monday. "All else being equal, these demand destruction channels can limit the required adjustment in the monetary stance."
Underlying inflation indicators have not yet signaled a sustained shift in medium-term price expectations, Lane said. However, the ECB now expects inflation to remain elevated longer than previously assumed, potentially delaying a return to target until mid-2027.
The central bank raised rates twice this summer. The ECB's current strategy reflects a measured response to the dual shocks: Lane described the stance as a "middle path" for monetary policy.
Economic growth has shown surprising resilience, supported by government spending and investment in artificial intelligence. But the fiscal impulse is expected to weaken in coming years, adding to growth headwinds from higher energy costs.
