Philip Lane, the chief economist of the European Central Bank (ECB), has indicated that interest-rate hikes are likely to continue beyond the March meeting. Currently, the market is almost certain about a 50-basis point rate hike for March. Lane has expressed the view that the information on underlying inflation pressures suggests that there will be a need to raise rates further beyond the meeting. However, he has expressed a need for calibration beyond March considering incoming data on inflation and macroeconomic projections of the ECB.
The comments of the ECB’s chief economist come amidst a backdrop of growing confidence in the Eurozone economy. Recently, inflation has been flat in the Eurozone, but it is gradually moving closer to the 2% target set by the ECB. At the same time, economic growth has been robust, with the fourth quarter of 2021 achieving pre-pandemic levels, better than expected vaccination rates, and the European Union’s Recovery Fund supporting public investment. This growth strengthens the case for additional interest-rate hikes.
In particular, Philip Lane has highlighted several data sets the ECB will focus on to inform its future interest-rate policy. These data sets are largely economic in nature and include inflation data for March and April, first-quarter GDP, a range of sentiment indices, and various surveys conducted by the ECB. Additionally, the ECB will analyze updated information on employment and wages, credit creation and bank lending data, and member states’ stability program updates.
Considering these data sets, it is highly probable that the ECB will announce additional interest-rate hikes in the coming months. That said, policymakers also want to ensure that the economic recovery remains on track, and overly aggressive monetary policy may hinder this. As such, the central bank may remain cautious in assessing the data before deciding on the next round of rate hikes.
The ECB has made it clear that it intends to keep monetary policy accommodative for as long as needed to support a robust recovery in the Eurozone. While this has been the case, interest rates have remained low, and the central bank has implemented significant quantitative easing measures. However, as economic growth continues to improve and inflation moves closer to the 2% target, the ECB is now looking to reduce its intervention in the market.
The ECB’s decision to raise interest rates will be a significant policy shift as it will impact the Eurozone’s economic recovery. Nevertheless, the central bank’s policymakers have indicated that they will monitor the situation closely and remain flexible in their decision-making process. Any interest-rate hikes will be implemented gradually to avoid any shocks to the economy and support continued growth.
To summarize, the ECB is expected to announce further interest-rate hikes, as inflation moves closer to its target and the Eurozone economic recovery continues. Data sets including inflation data for March and April, economic sentiment indices, and other surveys will be closely monitored before any decision. While the ECB acknowledges the need to raise interest rates, policymakers also want to avoid hindering the economic recovery. As such, any rate hikes will likely be implemented gradually to support continued growth.