Speaking in London on Thursday, ECB Chief Economist Philip Lane said the latest energy surge tied to the conflict in the Middle East does not require an aggressive policy shift. "Sometimes you can look through, sometimes you have to respond in a moderate way, and sometimes you have to be non-linear about it," he said. "What we're saying right now is we think this is a mid-sized shock, and a measured response is what we need to do."
Lane said the ripple effects from higher energy costs into the broader economy are still contained, and officials are not seeing any "non-linear" behavior at present. He noted that wage contracts being signed are "quite moderate," and that officials expect underlying inflation to pick up next year. Eurostat figures show inflation across the euro area is at a three year high.
Central banks have to decide which price shocks to look through. Market Briefs covers that judgment free every weekday.
Many economists anticipate any final adjustment would come in December alongside fresh projections, a move that would put the deposit rate at 2.75% - just above the zone thought to be neutral for the economy. Some members of the Governing Council have cautioned that a mildly restrictive stance could be needed to steer inflation back to the 2% target. Earlier in the day, Croat central-bank Governor Ante Zigman said to expect a "very intense debate" at the late-October meeting.
The backdrop is clear: energy prices have flared, inflation pressures remain in the mix, and the ECB is weighing whether to add to this year's two hikes. If economists are right about a December call that would set the deposit rate at 2.75%, policy would sit just above neutral, with some officials signaling comfort with a mildly restrictive stance to pursue the 2% goal. For anyone tracking the cost of living and the direction of policy, the next few meetings will tell you a lot about how Europe's inflation fight evolves.
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