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ECB to inflict pain since it hikes rates into next year, Lane says - Financial Markets Worldwide

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Economy 12 hours ago (Sep 17, 2022 02: 05PM ET)

ECB to inflict pain as it hikes rates into next year, Lane says Reuters. FILE PHOTO: A symphony of light comprising bars, lines and circles in blue and yellow, the colours of europe, illuminates the south facade of the European Central Bank (ECB) headquarters in Frankfurt, Germany, December 30, 2021. REUTERS/Wol

By Padraic Halpin and Conor Humphries

WEXFORD, Ireland (Reuters) -The European Central Bank could raise interest levels into next year, causing pain for consumers since it tries to depress demand that’s now increasingly increasing sky high inflation, chief economist Philip Lane said on Saturday.

With inflation approaching double digit territory, the ECB delivered two oversized rate hikes in July and September, and promised a lot more action as even longterm price growth expectations are actually moving above its 2% target.

“We think that this will probably dampen demand, we’re not likely to pretend that is pain free,” Lane told a conference. “Demand is currently a way to obtain inflation pressure, it had been not six or nine months ago just as it now could be.”

At 0.75%, the ECB’s deposit rate continues to be too low since it continues to stimulate the economy, therefore the ECB’s job isn’t yet done, Lane added.

Most economists estimate that the neutral rate, where in fact the ECB is neither stimulating nor holding back growth, is between 1.5% and 2%. Markets however start to see the the surface of the rate cycle higher and investors now price in rates just above 2.5% next spring.

Lane had argued for months that the existing inflation is primarily because of the shock due to expensive energy prices. Monetary policy is basically powerless against such supply shocks therefore the ECB was on the list of last major central banks to hike rates.

But price growth has broadened out and began to seep into all areas of life while robust consumer demand can be driving prices.

Although Lane said rates could continue steadily to rise at each remaining meeting this season and could rise early next year, too, the ECB is keeping an open mind about where you can stop and can decide meeting by meeting.

Lane added that the euro zone economy will probably flatline on the winter season and a recession cannot be eliminated given high energy prices and a shortage of .

“If we think our base case would be to barely grow, a technical recession – falling right into a mild recession – can’t be eliminated,” he said separately within an interview with Irish broadcaster RTE.

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