Euro zone inflation could remain above the European Central Bank’s 2% target for some time, even if peace in the Middle East materialises, ECB chief economist Philip Lane said today.
The ECB raised interest rates this month to prevent higher energy prices from pushing up longer-term inflation expectations and financial markets see at least one more move later this year, even as energy prices have fallen well below recent highs.
Speaking to European politicians in Brussels, Professor Lane said inflation could remain well above target into the first half of 2027 after it rose above 3% last month.
“While recent progress towards a resolution of the conflict in the Middle East is welcome, uncertainty remains elevated and there are continued risks for inflation to stay above our 2%medium-term target for quite some time,” he told the European Parliaments ECON committee.
However, charts published along with Philip Lane’s speech also showed that the recent fall in prices now puts oil more firmly between the bank’s “baseline” and “milder” scenarios.
While these scenarios do not directly impact the next policy decision, a move towards the milder outcome lowers any urgency for the ECB to follow its June hike already next month.
Indeed, markets see just a one in five chance of a hike in July and the next move is fully priced in only for December.
Philip Lane added that high inflation and expensive energy will weigh on economic activity but the impact will be muted given a solid labour market and heavy investment into AI.
“In addition, higher government spending on defence and infrastructure should continue to support public investment. These factors are expected to provide some cushioning against the fallout from the war,” he added.