Eurozone inflation to stay above 3% all year, says ECB chief economist

Inflation in the Eurozone is expected to stay above 3% for the entire year, despite being characterized as a moderate shock rather than a major imbalance, according to European Central Bank (ECB) Chief Economist Philip Lane.

Speaking at an event hosted by Natixis, Lane stated that the Eurozone economy is experiencing an inflationary shock that is neither excessively large nor persistent. He indicated that the ECB's response involves balanced monetary policy. "We are not in a scenario of major inflationary imbalance," Lane remarked, as reported by Reuters.

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It is a shock that is neither too large nor too persistent, but to which you respond with a balanced monetary policy. If you like, that's where we are now. We are not in a scenario of major inflationary imbalance.

These comments follow the ECB's recent decision to increase interest rates. This move aims to curb price expectations and prevent inflationary pressures from becoming entrenched. Lane explained that while geopolitical tensions in the Middle East have eased, their effects on prices have already been felt and will continue to influence the European economy. The ECB forecasts inflation to remain above its 2% target even in 2027.

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We have seen some improvement this week, but there are enough cost increases that are yet to be passed on to the economy, so we estimate that inflation will remain above 3% throughout this year.

Lane cautioned that price pressures could extend to the labor market, potentially leading to new demands for wage increases. Markets are currently pricing in one or two more interest rate hikes from the ECB, with a further increase anticipated in October. The ECB's estimated neutral interest rate, which neither stimulates nor hinders the economy, is between 1.75% and 2.50%, suggesting a potential new hike would bring the key rate to the upper limit of this range.

Despite the impact of high energy prices, Lane acknowledged that the Eurozone economy shows resilience. He pointed to robust household savings supporting consumption, growing investments driven by artificial intelligence and increased defense spending, and the overall strength of the European financial system as factors contributing to economic growth. "Households have sufficient savings to support consumption, investments continue to grow, and the financial system remains profitable and has consistent liquidity," Lane concluded.

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Households have sufficient savings to support consumption, investments continue to grow, and the financial system remains profitable and has consistent liquidity.