ECB’s Lane: Further Rate Hikes Still Justified Despite Milder Economic Outlook

European Central Bank (ECB) Chief Economist Philip Lane stated on Tuesday that additional interest rate increases remain justified, even as the eurozone’s economic outlook has softened. Speaking at an event in Dublin, Lane emphasized that inflation pressures, while easing, are still too elevated for the central bank to pause its tightening cycle prematurely.

Rate Path Unchanged by Milder Growth Projections

Lane acknowledged that recent economic data points to a weaker growth trajectory for the euro area, but he argued that this alone does not warrant a halt to rate hikes. ‘The moderation in growth does not negate the need for further tightening,’ Lane said. ‘Inflation remains above our target, and underlying price pressures are persistent.’

The ECB has raised its key deposit rate by a cumulative 4.25 percentage points since July 2022, bringing it to 3.75%. Markets have been speculating that the central bank may soon end its hiking cycle as the economy slows, but Lane’s comments suggest policymakers remain focused on bringing inflation back to the 2% target.

Core Inflation Still a Concern

While headline inflation in the eurozone has fallen from double-digit peaks to 5.5% in June, core inflation—which excludes volatile energy and food prices—has proven stickier, hovering around 5.4%. Lane highlighted that services inflation, driven by strong wage growth, remains a particular worry. ‘Wage pressures are feeding through into prices, and this process is not yet complete,’ he noted.

The ECB’s latest staff projections, released in June, forecast inflation averaging 5.4% in 2023, 3.0% in 2024, and 2.2% in 2025—still above target through the forecast horizon. Lane stressed that rates will need to stay ‘sufficiently restrictive’ for as long as necessary to ensure inflation returns to 2% in a timely manner.

Implications for Investors and Borrowers

For financial markets, Lane’s reaffirmation of a hawkish stance suggests that the ECB is unlikely to cut rates in the near term, even if the economy weakens further. Investors should expect continued volatility in eurozone bond yields and the euro exchange rate as the central bank maintains its tightening bias.

For households and businesses, the message is clear: borrowing costs will remain elevated, and further increases are possible. Mortgage rates and corporate loan costs have already risen sharply, and additional hikes would add to the financial strain on indebted borrowers. However, the ECB’s primary mandate remains price stability, and policymakers are signaling they will prioritize inflation control over supporting short-term growth.

Conclusion

ECB Chief Economist Philip Lane’s remarks underscore the central bank’s commitment to taming inflation, even as the eurozone economy faces headwinds. While the milder outlook may temper the pace of tightening, further rate hikes remain on the table. The key question for markets and consumers is how high rates will ultimately go—and how long they will stay there.

FAQs

Q1: Why does the ECB still want to raise rates if the economy is slowing?
A1: The ECB’s primary mandate is price stability. Inflation remains well above the 2% target, and core inflation—especially in services—is proving persistent. The central bank views bringing inflation down as essential for long-term economic health, even if it means accepting slower short-term growth.

Q2: How high could ECB rates go?
A2: Markets currently expect the ECB’s deposit rate to peak around 4% by the end of 2023. However, Lane’s comments suggest that further increases beyond current expectations cannot be ruled out if inflation does not moderate as forecast. The exact peak will depend on incoming data.

Q3: What does this mean for eurozone borrowers?
A3: Borrowers should prepare for higher borrowing costs for an extended period. Variable-rate mortgages and corporate loans will become more expensive if the ECB raises rates further. Even after the hiking cycle ends, rates are expected to remain elevated until inflation is firmly under control, which could take years.