Inflation in the euro zone hit a fresh record on Friday and investors are expecting the ECB to ditch its policy of negative interest rates and massive bond purchases, which was adopted eight years ago to revive sluggish price growth.
Lane seemed to confirm expectations of an imminent increase to the ECB’s deposit rate, which investors expect in July, but he was cautious on further hikes, citing the war in Ukraine as a risk to the outlook.
“The story is not the issue about ‘are we going to move away from minus 0.5 (%) for the deposit rate’,” Lane said on Bloomberg TV.
“The big issue which we do have to still be data-dependent about is the scale and the timing of interest rate normalisation.”
The ECB has never said what it meant by normalisation but policymakers who spoke to Reuters said that equated to a policy rate of between 1% and 1.25%.
Investors are pricing in nearly 90 basis points of ECB hikes by the end of this year.
Data earlier on Friday showed euro zone inflation inched up to a new record high of 7.5% in April, driven by a persistent surge in energy and food prices.
But even with those volatile items filtered out, inflation still rose to 3.9%, or nearly twice the ECB’s 2% target, showing price pressures were rising in all corners of the economy.
“In the near-term, yes, inflation is very high and that does carry its own risk of momentum,” Lane said.
“On the other hand the high energy prices are eating into disposable incomes, it’s reducing consumption and the war has a scope – especially depending on how it goes – in terms of mapping into lower investment, lower consumption, confidence effects and extra pressure on energy.”
Source: Economy - investing.com
