ECB says more hikes needed if bank stress stays contained

THE European Central Bank will need to increase interest rates further if recent stress in the financial system stays contained, chief economist Philip Lane told Zeit in an interview.

Under the ECB’s baseline scenario, “we expect these tensions will settle down” and then “more hikes will be needed,” Lane said. 

“If the financial stress we see is non-zero, but turns out to be still fairly limited, interest rates will still need to go up,” he told the German weekly newspaper. “However, if the financial stress we talked about becomes stronger, then we’ll have to see what’s appropriate.”

The comments provide a new glimpse on the evolution of the ECB’s thinking on how to navigate the combination of both global finance stress and a festering inflation shock.

The ECB hiked rates by a half point earlier this month, though – faced with a banking crisis in the US and Switzerland – it held off on giving guidance on its next move. With turmoil subsiding, hawkish policymakers have become more outspoken to resume calls for further tightening.

“It remains the case that there’s no direct read-across to the euro area,” Lane said. “In the baseline, we expect these tensions will settle down.”

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He also underscored recent comments by other central bankers that the ECB’s doesn’t face a trade-off between protecting financial stability and controlling inflation. 

“If this financial stress weakens the economy, it would automatically reduce the inflationary pressures,” Lane said.

Euro-area inflation data due Friday are likely to show a drop in headline inflation, though the underlying reading, which excludes energy and food, is predicted to hit a new euro-era record. BLOOMBERG