ECB to raise interest rates steadily, says chief economist

The European Central Bank is expected to raise its interest rate at a “steady pace” until it reaches the end of its bullish cycle, in part to maintain room to correct the tightening path if circumstances change, the ECB’s chief economist said. Philip Lane, this Monday (29).

The ECB raised interest rates by 50 basis points to zero in July, and while a similar move was expected in September, a number of policymakers have been advocating a greater adjustment due to a worsening inflation outlook.

“A steady pace, which is neither too slow nor too fast, to close the terminal rate gap is important for several reasons,” Lane said, without expressing his preference for the Sept.

While the “terminal” rate is an open question, policymakers have said the ECB should reach a neutral rate, which neither stimulates nor cools the economy, sometime around the turn of the year. That rate is estimated to be around 1.5% to 2%, suggesting that borrowing costs will increase at all remaining monetary policy meetings this year.

“While upside risks to inflation are currently more intense than downside risks, if incoming data calls for a downward shift in the terminal rate, that would be easier to address with a step-by-step approach,” Lane said.

He also noted that even if current inflation is high, indicators of long-term expectations remain close to the ECB’s 2% target, as economic actors seem to understand that the temporary factors behind the current price rise will fade and the ECB will do its job.